New HAMP Guidelines

Modifying the Home Affordable Modification Program (HAMP)

On March 25, 2010, the Obama administration expanded the Making Home Affordable (MHA) program to include assistance for those homeowners who are both unemployed and underwater on their mortgage. More financial incentives will be offered to lenders who assist these homeowners with avoiding foreclosure. The program will be implemented “within the next few months,” according to the MHA’s FAQ page.

Debt forgiveness is a major theme of this new extension of the Home Affordable Modification Program (HAMP). Lenders will be asked to grant a forbearance on the mortgage loans of certain unemployed borrowers who already meet HAMP’s eligibility requirements. The forbearance would equal any amount over a 115 percent loan-to-value (LTV) ratio as needed to bring the homeowner’s monthly payment to 31 percent of their monthly income. Afterward, if the homeowner makes all mortgage payments on time, the discounted principal would be forgiven over the following three years.

During a forbearance period of three to six months, which is meant to allow the borrower time to secure permanent employment, eligible borrowers who can prove that they qualify for unemployment benefits will be allowed a reduced mortgage payment. If the borrower cannot find substantial permanent employment during the forbearance period, he or she will be considered for a permanent HAMP loan modification or HAFA (Home Affordable Foreclosure Alternatives) option in order to avoid foreclosure.

Lenders will be required to hold off on foreclosure actions after the borrower is accepted by HAMP for a trial modification and continue postponing the foreclosure until either the borrower’s trouble is resolved or the borrower ceases to be eligible for all HAMP or HAFA programs.

Participation in all government loan workout programs is voluntary for private lenders. However, to encourage compliance with the program, mortgage lenders would receive a financial incentive to discount the mortgage principal for a qualifying homeowner if the value of the home is significantly less than the balance due on the loan. Incentives would increase with the amount of debt forgiven on a pay-for-success basis.

The new HAMP modifications also include provisions to help borrowers who are seeking bankruptcy protection and borrowers whose loans are insured by the FHA. The relocation bonuses offered in the original HAMP plan were doubled, and the amount of lender financial incentives were increased.

Both the lending institutions and the federal government would share the expenses associated with processing the paperwork, but federal funds for lender incentives would be taken out of the unused portion of the Troubled Asset Relief Program (TARP) money instead of requiring any new appropriations.

The goal of the new HAMP modifications is to assist homeowners who are in default only due to economic circumstances. The program joins several others implemented over the past few months to stabilize the housing market.