Boy, it sure seems like every day there is a new plan out there to help the housing market!
The Wall Street Journal reported yesterday on a new plan by the Obama Administration to cut mortgage balances without actually getting the borrowers out of the home.
Before we go into analysis, here are the documents about the program:
The new program is being billed as an enhancement to the HAMP program, which we have talked about extensively on this blog. It is being funded (the tune of $50 billion) by the TARP (Troubled Asset Relief Program).
The program is designed has four goals, but two of them are simply tweaks. The two that represent entirely new areas are:
First, is temporary assistance for unemployed homeowners. Eligible homeowners will be able to get their payments reduced, and possibly even eliminated, for a period of 3-6 months.
This program doesn’t have a set kickoff date but the memo states it should be fully in place by the fall. Eligibility is the same as HAMP. Additionally, you must apply within 90 days of delinquency on a loan and have proof that you are receiving unemployment benefits.
Secondly, principle write-downs for underwater homeowners. This is a modification to the current HAMP (Home Affordable Modification Program), the loan modification arm of the MHA (Making Home Affordable) program, which was designed to help individuals refinance or restructure their mortgage, and helping lower their monthly payments by reducing the interest on the loan, increasing the loan length, or a number of other creative methods not involving loan balance reductions.
The new modifications to the HAMP program now put principle reductions on the plate as well. It’s almost like an in-place “short sale” without actually selling the property. The WSJ calls it a “short-refinance”.
Friday’s announcement, of course, will get lots of attention because it is also expanding HAMP to include loan balance reductions to the toolkit that banks have to use to lower mortgage balances.
What does it all mean? Well, the WSJ sums it up quite well in that the administration really is getting flak from all sides and has to tread carefully:
The administration, under pressure from community activists, lawmakers and some mortgage investors, is trying to walk a fine line with these changes. Officials want to respond to criticism that HAMP hasn’t done enough to prevent foreclosures. But they also are heeding warnings from big banks that a full-fledged embrace of the idea of reducing principal might prompt many borrowers who can still afford their mortgage payments to default in the hope of being rewarded with a smaller loan.
In other words, the principle reduction plan will encourage homeowners to default on their loans so they can qualify for what is essentially a free write-off of principle as apart of a loan modification.
What’s next down the pike for federal programs? Apparently a plan as well to deal with second mortgages:
The administration also has struggled to launch a program designed to encourage banks to modify second-lien mortgages. The administration is expected to increase incentive payments under that program.
For investors, we think this is similar to our analysis of the HAFA program, in that it will have a marginal impact. Again, “marginal” when spread across the nation can still be significant; so it’s one to watch closely. But the HAMP requirements ahead of time will limit the volume to which this applies. While some homeowners may be motivated to “walk away” from their mortgages to help usher in a principle reduction under these new modifications, we think that will be the exception rather than the rule, since credit is still damaged and their is no guarantee the modification will be successful.
Bullet points of the plan:
Improvements to the Home Affordable Modification Program – More Help for Homeowners
1. Temporary assistance for unemployed homeowners while they search for re-employment
- Mortgage payments reduced to affordable level for a minimum of three months, and up to 6 months for some borrowers, while eligible homeowner looks for new job
2. Requirement to consider alternative principal write-down approach and increased principal write-down
incentives
- All servicers required to consider 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
3. Improvements to reach more borrowers with HAMP modifications
- Improvements to borrower solicitation requirements including clear performance timeframes for both servicers and borrowers and a prohibition against initiation of a new foreclosure referral when a borrower is cooperating with the servicer to obtain a modification
- Borrowers in active bankruptcy must be considered for HAMP upon request
- Increased incentives for servicers to provide permanent HAMP modifications
- Expansion of HAMP to include homeowners with FHA loans
4. Helping homeowners move to more affordable housing
- Relocation assistance payments to homeowners receiving foreclosure alternatives doubled
- Increased incentives to servicers and lenders, including increased incentives for extinguishment of subordinate liens, to encourage more short sales and other alternatives to foreclosure
