The Obama administration today announced changes to the Home Affordable Modification Program targeted at helping unemployed and "underwater" homeowners, two groups critics of the program have said haven’t been getting help.

HAMP loan servicers will be required to provide three to six months of forbearance to eligible homeowners who lose their jobs, reducing their mortgage payments to a level that doesn’t exceed 31 percent of their monthly income.

Some homeowners who owe more than their homes are worth will also be able to refinance into loans guaranteed by the Federal Housing Administration, if lenders agree to write down at least 10 percent of their principal and bring the borrower’s combined loan-to-value ratio down to 115 percent or less.

The FHA refinance program will include $14 billion in incentives to lenders to write down second, or "piggyback," loans, which are often obstacles to loan modifications.

The HAMP program changes — which also include an expanded eligibility criteria and increased short-sale incentives for borrowers who don’t qualify for a loan modification — will help the program meet its goal of "offering a second chance" to up to 3 million to 4 million homeowners through the end of 2012, the administration said in a press release.

The move comes on the heels of a report by the special inspector general for the Troubled Asset Relief Program (TARP) that questioned whether that is a meaningful goal.

When the program was launched, the report noted, the Treasury Department said it was intended to "help up to 3 (million) to 4 million at-risk homeowners avoid foreclosure … by reducing monthly payments to sustainable levels."

Now, the administration says the program’s goal is to make offers of trial modifications to that many people — a goal that "is not particularly meaningful," the inspector general’s report said.

"The goal that should be developed and tracked is how many people are helped to avoid foreclosure and stay in their homes through permanent modifications," the report said. "Transparency and accountability demand that Treasury establish goals that are meaningful, and that it report its progress … on a monthly basis."

At the end of February, more than 1.3 million homeowners had been offered trial HAMP loan modifications, and 1 million HAMP loan modifications were in effect. Of those, 835,194 were trial modifications, and 168,709 were "permanent" modifications that provide guaranteed lower payments for five years, according to the latest monthly HAMP report from the Treasury.

Before the changes in the HAMP program announced today — some of which will take months to implement — one Treasury Department official estimated that the program could produce 1.5 to 2 million permanent loan modifications. That may be "only a small fraction of the total number of foreclosures that will occur during that period," the report warned.

Even if the program generates that many permanent loan modifications, it "will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway," the report said.

The HAMP program does not factor in borrowers’ non-mortgage debt, or their ability to continue paying their mortgage after the five-year period of reduced payments provided by "permanent" loan modifications expires, the report said.

The report also noted that many borrowers receiving HAMP loan modifications are still saddled with second loans, and that those who owe more than their home is worth may "decide that it makes more economic sense for them to walk away from their mortgages" — a so-called "strategic default." …CONTINUED

In a report issued in October, a Congressional Oversight Panel overseeing TARP was also critical of the HAMP program, which has been allocated $75 billion in TARP funding. That report concluded that the program was too focused on subprime loans to address foreclosures caused by unemployment and head off a projected 10 million to 12 million foreclosure starts in coming years (see story).

Under the changes announced today, loan servicers participating in HAMP are required to provide temporary assistance to unemployed homeowners who meet the program’s eligibility requirements, can show they are receiving unemployment insurance, and who request temporary assistance in the first 90 days of delinquency. To be eligible for HAMP, a borrower’s loan balance can’t exceed $727,750, and the borrower’s loan must have been originated before Jan. 1, 2009.

The HAMP program will also require loan servicers to use a "net present value" test to calculate whether they would be better off forgiving principal for HAMP-eligible borrowers whose loan-to-value ratio (LTV) exceeds 115 percent, instead of taking the more standard approach of lowering their mortgage rate, extending the term of their loan, and forbearing additional principal.

Incentives are also being increased for lenders who agree to extinguish or partially extinguish second loans.

To expand the pool of HAMP-eligible borrowers, homeowners with FHA loans will be eligible for HAMP, and loan servicers will be required to consider borrowers in bankruptcy for HAMP.

Underwater borrowers will be permitted to refinance into an FHA loan that can’t exceed 97.75 percent of the appraised value of the home when lenders agree to principal writedowns and get the combined LTV of their first and second loans down to 115 percent or less.

Ironically, borrowers who are already in FHA loans will not be eligible for that program because FHA is currently prohibited by law from offering principal forgiveness.

The Mortgage Bankers Association welcomed the changes but warned that loan servicers may be bound by contractual restrictions or requirements of mortgage investors in considering principal writedowns.

"Expanding refinance opportunities for FHA borrowers and creating a HAMP component encouraging the reduction of mortgage principal gives servicers yet more tools they can use to help underwater borrowers," MBA President and CEO John Courson said in a statement.

As for principal writedowns, Courson said, "Each servicer will need to determine whether this is the best approach to help the individual borrower, keeping in mind any contractual restrictions or requirements from the mortgage investor."

John Taylor, president and CEO of the National Community Investment Coalition, doubts those incentives will be enough to convince servicers and investors to reduce loan principals.

"Will they help 7 million people who are at risk of foreclosure? I will be pleasantly shocked if investors step up for half a million borrowers," Taylor said in a statement. Mandatory principal writedowns are needed to prevent more foreclosures, he said.

For borrowers who don’t qualify for a loan modification, the HAMP program will offer additional incentives when they agree to a short sale or deed in lieu of foreclosure. Relocation assistance for homeowners who agree to a short sale is being doubled to $3,000, and the government is also doubling the maximum reimbursement to second loan investors to $2,000.


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