As part of its ongoing commitment to continuously improve housing relief efforts, the Obama administration announced on March 26 adjustments to the Home Affordable Modification Program (HAMP) and to the Federal Housing Administration (FHA) programs. 

According to a press release from the Department of Housing and Urban Development (HUD), the program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own.

“The program modifications will expand flexibility for mortgage servicers and originators to assist more unemployed homeowners and to help more people who owe more on their mortgage than their home is worth because their local markets saw large declines in home values,” the release stated.

According to HUD, the changes will help the administration meet its goal of stabilizing housing markets by offering a second chance to up to 3 to 4 million struggling homeowners through the end of 2012. Costs will be shared between the private sector and the federal government. The Federal cost of the changes will be funded through the $50 billion allocation for housing programs under the Troubled Asset Relief Program (TARP).

Adjustments to HAMP

The HAMP program will now provide for temporary assistance for unemployed homeowners while they search for re-employment. This assistance will consist of reducing the homeowner’s mortgage payments for a minimum of three months to a maximum of six months while the homeowner actively searches for a job.

The changes will also include a requirement for servicers to consider alternative principal write-down approaches and increase principal write-down incentives. As stated in the “HAMP Improvements fact sheet,” all servicers are now required to consider an alternative modification approach that emphasizes principal write-down with incentives based on the dollar value of the principal reduced. The principal reduction and the incentives will be earned by the borrower and investor based on a pay-for-success structure.

Improvements to the program are also being implemented to reach more borrowers with HAMP modifications and to prohibit against the initiation of a new foreclosure referral when a borrower is cooperating with the servicer to obtain a modification. Other changes include:

• Borrowers in active bankruptcy must be considered for HAMP upon request;
• Increased incentives for servicers to provide permanent HAMP modifications; and
• The expansion of HAMP to include homeowners with FHA loans.

In addition, relocation assistance payments to homeowners receiving foreclosure alternatives is being doubled and there are now increased incentives to servicers and lenders, including increased incentives for extinguishment of subordinate liens, to encourage more short sales and other alternatives to foreclosure.

Adjustments to FHA programs

Highlights of changes to the FHA program, which have been implemented to support refinancing for underwater homeowners, will, among other things:

• Encouraging responsible restructuring and refinancing through is voluntary option. This will encourage lenders and borrowers to work together, when appropriate, to restructure underwater mortgages. Because it is voluntary for lenders, not all underwater borrowers who meet the criteria will receive an FHA refinance loan.
• Enable refinancing into more sustainable loans that are no higher when compared to the value of the home than the standard FHA refinance loan (97.75 percent).
• Enable refinancing to a reduced monthly payment at current low interest rates to facilitate affordable homeownership.

In addition, HUD outlined incentives for principal write-downs on second liens, but to qualify for a refinance, all mortgage debt including second liens must be written down to a maximum of 115 percent of the current value of the home.

FHA has promised more transparency on the impact of the refinancings. It has indicated it will publish data on the number of loans, average percentage written down and quantity of the principal that is reduced quarterly. In addition, TARP funds will be made available up to a total of $14 billion to provide incentives to support write-downs of second liens and encourage participation by servicers and to provide additional coverage for a share of potential losses on the loans.

Housing policy overview

HUD stated that the administration’s goal is to promote stability for both the housing market and homeowners. To meet these objectives, it has developed a comprehensive approach using state and local housing agency initiatives, tax credits for homebuyers, neighborhood stabilization and community development programs, mortgage modifications and refinancing and support for Fannie Mae and Freddie Mac. The administration’s efforts for homeowners have focused on giving responsible households an opportunity to remain in their homes when possible while they get back up on their feet, or to relocate to a more sustainable living situation.

“Today, mortgage rates are at record lows and, thanks in large part to these programs, more than 4 million homeowners have refinanced their mortgages to more affordable levels helping to save more than $7 billion annually, more than 1 million are saving an average of over $500 per month through the administration’s modification program, home equity increased by more than $12,000 for the average homeowner in the last three quarters last year and the economy is growing,” HUD reported.

However, even with these improvements homeowners and servicers still face challenges. HUD said servicers were slow to implement HAMP, resulting in a slow start for the program. Recent improvements in the program have accelerated the pace of modifications, and the announced adjustments will improve performance.

"But our strategy to address the crisis must evolve because our challenges have also evolved,” HUD said. “Our housing initiatives must balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot and should not help everyone. The President has said: ‘We can’t stop every foreclosure.” And in fact, we can’t maintain the balance described above if we assist every borrower.”

For example, investors and speculators should not be protected under the efforts, nor should Americans living in million dollar homes or defaulters on vacation homes. Some people simply will not be able to afford to stay in their homes because they bought more than they could afford. Instead, HUD said the administration must focus on providing responsible homeowners opportunities to obtain a modification or to refinance and prevent avoidable foreclosures and, when necessary, must facilitate the transition to a more sustainable housing situation.

“The adjustments announced today are tailored to accomplish these goals by helping a targeted group of borrowers,” HUD said.

Eligible homeowners for modifications under HAMP must, for example: live in an owner occupied principal residence, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners.

“The FHA refinance options being announced today will provide more opportunities for lenders to restructure loans for some families who owe more than their home is worth. This is a voluntary program for lenders and homeowners. The population eligible for a FHA refinance must be current on their mortgage. This rewards responsible homeowners and creates stabilizing incentives in the housing market,” HUD said.

Through its housing initiatives, the administration has taken the following actions to strengthen the housing market:

• Provided strong support to Fannie Mae and Freddie Mac to ensure continued access to affordable mortgage credit across the market;
• Together, Treasury and the Federal Reserve have purchased more than $1.4 trillion in agency mortgage backed securities, which have helped keep mortgage rates at historic lows, allowing homeowners to access credit to purchase new homes and refinance into more affordable monthly payments; and
• The FHA has played an important counter-cyclical role, providing liquidity for housing purchases at a time when private lending has declined; Launched a modification initiative to help homeowners reduce mortgage payments to affordable levels and to prevent avoidable foreclosures;
• Supported expanding the limits for loans guaranteed by Fannie Mae, Freddie Mac and FHA from previous limits up to $625,500 per loan to $729,750;
• Expanded refinancing flexibilities for the Fannie Mae and Freddie Mac loans, particularly for borrowers with negative equity, to allow more Americans to refinance;
• Launched a $23.5 billion Housing Finance Agencies Initiative which is helping more than 90 state and local housing finance agencies across 49 states provide sustainable homeownership and rental resources for American families;
• Supported the first time homebuyer tax credit, which has helped hundreds of thousands of Americans purchase homes.
• Is providing over $5 billion in support for affordable rental housing through low income housing tax credit programs and $2 billion in support for the Neighborhood Stabilization Program to restore neighborhoods hardest hit by concentrated foreclosures; and
• On Feb. 19, 2010, announced the $1.5 billion HFA Hardest Hit Fund for housing finance agencies in the nation’s hardest hit housing markets to design innovative, locally targeted foreclosure prevention programs.

Today mortgage rates remain at historic lows. The primary interest rate is now about 5 percent, lower than at any time in the three decades before the crisis. HUD reported that it is also seeing encouraging signs in housing indicators — home prices and the pace of home sales have stabilized in recent months.