In case you missed the news, the government wants to keep you in your home; like it or not. They’ve employed several programs to carry out the task, each seemingly more aggressive than the next. Personally the whole thing reminds me of a bad pot of soup. Chef Obama and his sous chef Mr. Geithner keep adding salt and pepper until the whole mess is inedible, all the while wasting the remaining ingredients in the kitchen leaving cupboards bare and guests unfed.The latest push comes in the form of the Home Affordable Refinance Program or HAMP. Per the Treasury press release, the $75 Billion program aims to prevent foreclosures and help responsible families stay in their homes. The program will do so by partnering directly with the lenders carrying non-performing loans, via the GSE’s (Fannie and Freddie), FHA, and the FDIC.How does it work you ask? HAMP will reach from 3 to 4 million at-risk homeowners using a five prong strategy. Here are the highlights:Five Prong Strategy1. Create clear and consistent guidelines for loan modifications2. Require that banks use the US Treasury guidelines when modifying loans3. Allow judicial modifications during bankruptcy when borrowers have no other options4. Require strong government oversight at banks to monitor compliance5. Strengthening FHA programs by providing support for local communitiesWho is Eligible for the Program* At risk homeowners suffering from serious financial hardship. These hardships includes financial shock from temporary loss of income, those experiencing increases in monthly expenses, and/or those suffering from payment shock resulting from an interest rate adjustment or reset on their mortgage. The at risk definition also applies to homeowners deemed “underwater” (with a combined mortgage balance higher than the current market value of the house).* Homeowners facing imminent default of their mortgage. You are not required to be behind on your mortgage payments to be eligible for a loan modification. Quite the opposite in fact. Studies show that modifications are actually more likely to succeed when done by borrowers before they miss payments. Therefore regardless of whether you are current or behind on your mortgage, you may call your lender to request a loan modification.* Owner occupied homeowners ONLY! No flippers – The government calls this a “common sense restriction.” If you are a speculator, which I assume is their broad term for investor, and/or a house flipper you are out of luck when it comes to the HAMP program. This isn’t to say banks won’t modify your loan too, rather the incentives from the HAMP program will not apply.* FHA conforming loans ONLY! No jumbo mortgages – Another of the so called “common sense restrictions” the HAMP program does not help homeowners who needed jumbo loans when purchasing their home. The incentives in the program are targeted towards helping buyers within the FHA loan limits. To clarify, it does not require that a homeowner have an FHA loan, simply that the loan balance fall within the loan limits of the FHA program guidelines.* High debt level borrowers who agree to enter HUD certified consumer debt counseling – This is a special provision for individual homeowners who also meet the other provisions of the program. If their back end debt, which includes all monthly expenses in addition to their mortgage, is equal to 55 percent of more of their total income, homeowners will be required to enter debt counseling to receive a loan modification.How it WorksThe simple goal of the program is to keep homeowners paying on their mortgages. The theory is that most defaults are not a result of homeowners choosing to walk away because they owe too much on their home, rather a belief that these defaults occur because the borrower cannot meet the monthly financial obligation. By adjusting monthly payments, fewer defaults will occur and housing markets will be stabilized.The government and lenders will share the effort to lower monthly mortgage payments to between 31 percent and 38 percent of a borrowers’ gross monthly income. The first burden will be on the lenders with the government batting clean up. Steps involved in reaching this goal are as follows:1. Lenders will reduce interest rates on the current loan to as low as 2 percent hoping to reach DTI ratios of 31 percent2. If interest rate reductions don’t accomplish the goal, amortization periods will be extended to 40 years to reach the proper ratio3. If after completing steps 1 and 2 DTI ratios still have not reached 31 percent, lenders may forbear principal at zero interest until ratios are met4. the federal program will supplement lenders efforts by sharing the costs involved with reducing ratios from 38 percent to the desired 31 percent ratio5. modifications will be kept in place for 5 years. After 5 years interest rates can be increased by 1 percent each year to the conforming loan survey rate in place at the time of modification.Incentives for SuccessAs incentive to loan servicing companies, the HAMP program will reward each servicer with an upfront fee of $1,000 for each successful modification made within the guidelines. Further servicers will be given an additional $1,000 per year up to 3 years, called a “Pay for Success” incentive as long as the borrower successfully remains in the program. These success incentives will also be available to servicers who modify, FHA, VA, or agriculture department loans, and/or refinance loans according to the Hope for Homeowners programs.Lenders and servicers willing to reach out to borrowers not currently in default may receive an additional $2,000 incentive payment ($1,500 to mortgage holders and $500 to servicers) by completing successful loan modifications before a borrower misses a payment. Borrowers themselves will receive further incentive by successfully staying in the modification program. An additional $1,000 per year, up to five years, will be given to borrowers going straight towards reducing the principal balance on the mortgage loan.Addressing Further Value ErosionOne of the outstanding issues concerning lenders is the risk of further value erosion if modifications fail and they are forced to ultimately foreclose at a later date. To address that issue the US Treasury Department will fund up to $10 Billion dollars for a program set to partially offset losses realized by lenders who experience steeper losses on foreclosed loans after completing a modification. Structured as a simple cash payment, it will be received by mortgage holders on each modification, linked to the declines in the home price index.Junior Liens Although junior lienholders are not required to participate, lenders and servicers participating in the HAMP program will receive additional incentive to extinguish junior liens in order to reduce the overall indebtedness of the borrower. Servicers will be reimbursed for the release according to a specified schedule and will receive an additional $250 payment for obtaining the release from a valid second lienholder.Thoughts and Issues Preferential treatment towards one class of borrower and geographic inequity across the 50 states are the two most glaring problems with the HAMP program. Although well intended and very much needed in the residential markets, the program will continue to be viewed as biased and raise resentment among the majority of borrowers, currently not eligible for the program. Clearly directed towards homeowners in the most dire of circumstances and with the fewest alternative solutions, wealthier borrowers and more sophisticated professional investors are left to fend for themselves.If lenders and the federal government encourage HAMP qualifying borrowers to place themselves in a better financial position by changing the terms of their agreed up on loan, and then paying them to do so, shouldn’t wealthier borrowers and investors be encouraged to do the same? If one group of borrower is “villainized” while others are forgiven for the same behavior isn’t it human nature for that first group to protect themselves against perceived unfair attacks?The message of the current administration is hope and change. Those of us encouraged by the message hoped that change would apply to all of us equally when reflected in public policy. Their required agenda includes the stemming of a financial meltdown in the financial markets driven by catastrophic losses in the residential real estate markets. Unfortunately the piecemeal approach to the problem has only encouraged more bad behavior by many who feel left out or villainized.In theory we all pay taxes and we all have an equal vote. In practice the policies and programs which spend tax payer money and address issues facing all groups of American citizens should be available equally and without bias or should not exist at all.
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