When first introduced in 2009, the (HAMP) Home Affordable Modification Program was initially predicted to help at least 3 million homeowners prevent foreclosure. To date only about 170,000 have received any kind of permanent or partial loan modifications - what a surprise! Whether you are for or against these types of government programs, the objectives were not met. So now begins the second phase of the program.
Loan Modification – Part 2
The government now is prepared to assist unemployed homeowners and those who are seriously underwater on their mortgages. Lenders will now be required to allow payment reductions for unemployed borrowers for at least three months and as long as six months.
If these homeowners do not have a loan of more than $729,750 and are currently receiving unemployment benefits, they can have their payments reduced to 31 percent or less of their monthly income for that time period. The normal payments will resume when the borrower gets a new job or the grace term is up, whichever comes first.
 The plan to help those who owe more than the value of their homes includes trying to encourage lenders to reduce principal balances. Although voluntary, lenders will be given $2,000 (double the previous amount) in federal assistance for every principal modification that complete.
In order to qualify, borrowers must owe more than 115% of the home value, use their home as their private residence and have a monthly mortgage payment that exceeds 31 percent of their gross monthly income.
Refinancing into FHA loans is another possibility, provided borrowers are current with their mortgage and their credit score is above 500 and that their current bank will write down at least 10% of their loan – (which may be difficult to accomplish).
Consumer Reactions
It will be interesting to see if this plan can be more successful than previous renditions. The incentive for banks to make modifications is really quite paltry. The other side of the issue is the general perception among those borrowers who have continued to make payments – and see the principal reductions as a reward form making poor decisions during the housing boom. This is clearly evident in the recent study conducted by Fannie Mae about consumer attitudes towards mortgage defaults.
The mandatory payment reductions for unemployed homeowners will have a direct impact on the housing market as it will delay foreclosures. Although this may drag out the process for some, the economy will benefit from not needing to absorb a high rate of foreclosures all at once.
These new programs appear to offer some smoothing out of the overall return to equilibrium in the housing market, provided that the results of these initiatives do not cancel each other out.
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