'Home Affordable' loan mods offer hope

Editor's note: This is Part 3 of a three-part series. Read Part 1 and Part 2.

My previous articles in this series criticized the Obama administration's new "Making Home Affordable" (MHA) program because it ignored negative equity -- which is the major factor underlying the currently horrendous foreclosure rate -- and because it offered refinance relief only to borrowers lucky enough to have their mortgages owned or guaranteed by Fannie Mae or Freddie Mac. This article is about the loan contract modification part of the program, which covers loans owned by any investor.

Like the refinance program, the loan modification part of MHA ignores negative equity and offers help only to owner-occupants. Investors are not eligible. Those negatives aside, the modification program is well designed. Its architects have taken note of a number of problems that have bedeviled existing modification programs, and have fashioned sensible remedies to deal with them.

Shortages of Trained Staff: The shortage of qualified staff by servicers, as well as the high cost of modifying loans, has resulted in many needless foreclosures that timely modifications could have prevented. The MHA remedy is to provide financial incentives to servicers to do more modifications.

Under the program, servicers are paid $1,000 for each eligible loan they modify, provided that the modified loan remains current through a trial period of at least 90 days. In addition, the servicer collects $1,000 a year for three years if the borrower stays current for that period.

High Incidence of Re-default: In the past, many borrowers with modified loans have subsequently defaulted. Many early modifications, however, did not reduce the borrower's payment, and in some cases the payment increased.

Under MHA, the interest rate is reduced to a level where payments for principal, interest, taxes and insurance comprise no more than 31 percent of the borrower's gross income. In addition, a borrower who stays current will receive $1,000 a year for up to five years in the form of balance reductions.

Restriction to Borrowers in Default: For the most part, servicers have limited modifications to borrowers who are two or more payments behind. This rule assured compliance with investor requirements that modifications were allowed only to avoid more costly foreclosures, and it also helped servicers allocate their limited staff to the most urgent situations. But it had the unfortunate effect of encouraging borrowers to default so they could get help.

The new program attempts to remedy this by establishing a "hardship" criteria for eligibility that does not require the borrower to be in default in order to qualify for a modification. In addition, bonuses of $1,500 to the investor and $500 to the servicer are offered for each modification that is executed while the borrower facing hardship is still in good standing.  ...CONTINUED

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