Real Estate & Mortgage Insights

Mortgage Modifications - Round Two

There may be some room for argument, but essentially the Obama administration�s initial foreclosure prevention plan has failed. The Home Affordable Modification Program (HAMP) was designed to help three million homeowners and so far only about 170,000 borrowers have received permanent loan modifications. So, enter phase two of the plan.

Now the government is ready to help unemployed homeowners and those who are seriously underwater on their mortgages. Lenders will now be required to allow payment reductions for unemployed borrowers for at least three months and as long as six months. If these homeowners do not have a loan of more than $729,750 and are currently receiving unemployment benefits, they can have their payments reduced to 31 percent or less of their monthly income for that time period. The normal payments will resume when the borrower gets a new job or the grace term is up, whichever comes first.

The plan to help those who owe more than the value of their homes includes trying again to encourage lenders to reduce principal balances. In order to qualify, borrowers must owe more than 115 percent of the home value, use their home as their private residence and have a monthly mortgage payment that exceeds 31 percent of their gross monthly income. This program is strictly voluntary though, and while banks will be given $2,000 in federal money for every principal reduction modification that they make, they are not required to cooperate with borrowers.

Refinancing into FHA loans will be another possibility for struggling homeowners. As long as borrowers are current on their mortgages, have a credit score above 500, and can get their mortgage holders to write down at least ten percent of their loan principal, homeowners can refinance their current loans into safe FHA mortgages.

All together, the new plan could help as many as 1.5 million borrowers avoid foreclosure, according to Mark Zandi, chief economist for Moody�s

The real question is whether these new programs work better than their predecessors. While the incentive for lenders to reduce loan balance principal has doubled, it may not be enough to entice banks to lower profits for their shareholders. Even if the program does generate a lot of principal reductions, it might spur some intense anger across the country among those who have been making their mortgage payments on time and have struggled to keep their financial obligations. Principal reductions are often highly controversial because they are seen as rewarding mostly those who took out exotic or risky loans during the housing boom.

The mandatory payment reductions for unemployed homeowners will have a direct impact on the housing market, though. It will delay foreclosure for many, many borrowers. While some say that this process simply drags out the inevitable and delays true recovery, others say that the delays on some foreclosures will help the decline in home prices take place at a slower, easier pace.

Eventually the housing market will have to come back to equilibrium of price and demand. These new programs seem to be both delaying and forcing a return to that equilibrium at the same time. Hopefully the results of these initiatives will not cancel each other out.

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