Treasury Dept expands HAMP program to stop foreclosures
The Obama administration has announced broad new initiatives to help troubled homeowners
Obama administration officials are ramping up their attempts to help struggling homeowners, announcing major changes to the government’s much-criticized $75-billion program to modify mortgages to stop foreclosures.
Mortgage relief for unemployed borrowers
The administration said it would require mortgage servicers participating in the program, including such major companies as Bank of America Corp. and JPMorgan Chase & Co., to reduce monthly mortgage payments for three to six months for unemployed homeowners as they look for new jobs.
The payments would be reduced to 31% of the homeowner’s current income.
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After the temporary period, homeowners who still have a mortgage payment of more than 31% of their gross monthly income would have to be considered for a permanently modified loan. The program is open to people who live in the home they purchased, took out their mortgage before Jan. 1, 2009, and have a loan balance below $729,750.
In addition to mortgage relief for unemployed borrowers, the program features four other key elements.
Principal write-downs
The first key is that the government will provide financial incentives to lenders who cut the balance of a borrower’s mortgage.
Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.
Until recently, administration officials had been reluctant to encourage lenders to cut the principal balance, worrying that this would encourage borrowers to become delinquent. But as federal regulators have struggled to make an impact on the foreclosure crisis, those qualms have weakened.
“We would prefer to see a required principal forgiveness program. But this is helpful,” said David Berenbaum, chief program officer for the National Community Reinvestment Coalition, a nonprofit housing group. “This is another tool that will help consumers weather the crisis.”
Second lien modifications
Second, the government will double the amount it pays to lenders who help modify second mortgages, such as piggyback loans, which enabled home buyers to put little or no money down, and home equity lines of credit.
These second mortgages are an added burden on struggling homeowners, especially when their total debt, as a result, is greater than their home value.
Federal officials have estimated that about half of all troubled homeowners have a second mortgage and last year launched a program to encourage lenders to restructure them. That effort has struggled to get off the ground.
Short sales
Third, the new effort also increases the incentives paid to those lenders who find a way to avoid foreclosing on delinquent borrowers even if they can’t qualify for mortgage relief.
For example, the administration is scheduled to launch a program next month encouraging lenders to have borrowers sell their homes for less than the mortgage balance in what is known as a short sale.
Underwater borrowers
Fourth, the administration is increasingly turning to the Federal Housing Administration to help underwater borrowers who are still keeping up their payments. The aim is to help these borrowers refinance into a more affordable loan. The FHA will offer incentives to lenders that reduce the amount borrowers owe on their primary mortgages by at least 10 percent.
For those borrowers who have more than one mortgage on their house, the FHA will allow refinancing of the first loan only. The new loan and any second mortgage could not exceed 15 percent of the home’s value. This approach is meant to benefit not only borrowers but also lenders by allowing them to offload mortgages that might otherwise fail.
Only homeowners who are refinancing their main residence, have a credit score above 500 and can document their income are eligible.
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Source: http://www.latimes.com/business/la-fi-obama-mortgages27-2010mar27,0,6966492.story
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