The administration unveiled major expansions to its foreclosure prevention plan Friday – expansions designed to help underwater and unemployed homeowners and push it closer to meeting President Obama’s goal of helping 3 to 4 million borrowers save their homes.
Treasury Assistant Secretary Herbert M. Allison pointed out in a conference call with reporters that the “nature of this housing crisis has changed over the past year,” from a subprime crisis to problems stemming from unemployment and negative equity. Allison says these new program adjustments will give mortgage servicers and originators the flexibility they need to assist “responsible homeowners who have been affected by the economic crisis through no fault of their own.”
Faith Schwartz, executive director of the HOPE NOW industry alliance, called the announcement “an important step forward for homeowners, who will now have more options to retain homeownership.”
Principal Reductions for Underwater
To expand the use of principal write-downs as part of the Home Affordable Modification Program (HAMP), participating servicers will be required to consider an “Alternative Modification Waterfall” in their evaluations, which includes writing down some principal for loans that are over 115 percent of the current value of the property (LTV). This alternative modification approach will include incentive payments for each dollar of principal write-down by servicers and investors.
The principal reduction and the incentives will be earned based on a pay-for-success structure. Servicers will initially forbear some or all of the principal balance over 115 percent LTV as needed to bring the borrower’s payment to 31 percent of income. Then, servicers will forgive this forborne amount in three equal amounts over three years, as long as the homeowner remains current on payments.
Treasury Assistant Secretary Michael S. Barr stressed that the new principal reduction approach “won’t apply to all loans with negative equity by any means.” But, he said, investors are concerned that negative equity could motivate homeowners to walk away from their mortgage, resulting in losses. Barr said the Treasury believes there will be a strong investor appetite for the principal write-down initiative because it will ultimately be “worth the tradeoff [of lowering the debt] by putting borrowers in position to perform for the long-term.”
FHA Refinancing for Underwater
The plan also gives the Federal Housing Administration (FHA) a much larger role in the government’s foreclosure prevention initiatives and makes the federal agency a key player in the government’s efforts to address the “underwater duress,” as FHA Commissioner David H. Stevens put it.
The FHA will provide lenders and servicers with a voluntary option of refinancing underwater loans into new federally-insured mortgages. Under the program, lenders must write down the principal of the original first mortgage at least 10 percent in order to refinance the loan at 97.75 LTV.
Incentives will be paid to second lien holders who also agree to write down their loans so that all the homeowner’s mortgage debt is a maximum of 115 percent of the current value of the home.
Stevens stressed that systems and criteria are already in place for this program; it has shades very similar to FHA’s Hope for Homeowners (H4H), which has seen lukewarm acceptance within the industry.
Jeb Mason, managing director of the Cypress Group and a former deputy assistant secretary at Treasury, says the FHA refinancing component “has met with resistance in the administration in the past, but has probably gained traction in light of recent criticism.”
Assistance for Unemployed
The program will require services to provide a minimum of three months, and up to six months for some borrowers, of temporary forbearance for unemployed homeowners while they search for another job. During this forbearance period, payments will be reduced to no more than 31 percent of their monthly income/unemployment benefits.
To be eligible, the home must be owner-occupied, the loan balance must be below $729,000, and the borrower must request temporary assistance in the first 90 days of delinquency.
After the forbearance period, borrowers will be evaluated for a HAMP modification. If the forbearance period ends without re-employment, the homeowner may be considered for an alternative to foreclosure under the program, such as a short sale or deed-in-lieu.
The Treasury is also bumping up payouts for short sales and deeds-in-lieu under its Home Affordable Foreclosure Alternatives (HAFA) program set to take effect April 5. Servicer incentives for each short sale or deed-in-lieu have been raised from $1,000 to $1,500.
There is also a new second lien payoff schedule that allows servicers to increase the amount paid to subordinate lien holders who agree to extinguish the borrower’s secondary loan when a short sale or deed-in-lieu is reached on the first mortgage. Second lien holders will receive up to 6 percent of the outstanding loan balance, double the previous 3 percent cap. In addition, the incentive reimbursement available to investors for subordinate lien payoffs has doubled from $1,000 to $2,000.
Relocation assistance payments to homeowners who receive a short sale or deed-in-lieu have also doubled, to $3,000.
All these program enhancements come on the heels of new consumer protections that the Treasury announced this week would be incorporated into HAMP on June 1, including requiring servicers to evaluate all borrowers who’ve missed at least two payments and prohibiting foreclosure proceedings until it’s determined borrowers are HAMP-ineligible.
The Treasury noted in its policy FAQs that it will take time to get these new initiatives up and running. Some pieces, such as increased payments for short sales and deeds-in-lieu, will be put in place in the coming weeks, with the full set of new program initiatives available by fall.
Officials said no additional taxpayer dollars will be needed for the new program enhancements or the increase in incentive payments. It will all be fully funded through the Troubled Asset Relief Program (TARP), more specifically, with the $50 billion in TARP funds that has already been set aside for HAMP.
According to Diana Farrell, deputy director of the National Economic Council, with the add-ons announced Friday, the program will stem enough foreclosures to meet the president’s target of helping 3 to 4 million struggling homeowners through modifications, refinanced loans, and foreclosure alternatives.
Farrell concedes that it’s not enough to avert foreclosure for all, with foreclosure risk estimates now climbing to 10 to 11 million, but it’s significant enough to “have a real material impact on the marketplace,” she told reporters.
“The purpose here is to deal with just enough of the overhang … to provide real help to those people for whom we believe foreclosure is preventable and not just kicking the can forward,” Farrell said.
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