The Obama Administration this morning outlined a major overhaul to its housing relief efforts, proposing significant changes to the Home Affordable Modification Program and to FHA programs.
The Mortgage Bankers Association and other industry groups reacted positively to the news, saying the adjustments will help homeowners stay in their homes while promoting fiscally responsible efforts by lenders, servicers and borrowers.
“These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own,” The White House said in a statement. “The program modifications will expand flexibility for mortgage servicers and originators to assist more unemployed homeowners and to help more people who owe more on their mortgage than their home is worth because their local markets saw large declines in home values.
At a news conference this morning, officials from the White House, HUD and Treasury said the overhaul targets borrowers who have been affected by unemployment (the current unemployment rate is 9.7 percent)
The overhaul has four key components:
• A forbearance program targeting unemployed borrowers;
• A new principal-reduction element of the administration’s Home Affordable Mortgage Program, known as HAMP;
• A new FHA refinance program; and
• An increase in incentives to banks, lenders and servicers to help borrowers avoid foreclosure who do not qualify for other mortgage relief programs.
Administration officials said the changes will help it meet its goal of stabilizing housing markets by offering a second chance to up to 3-4 million struggling homeowners through the end of 2012. Costs would be shared between the private sector and the federal government; the federal cost of these changes will be funded through the $50 billion allocation for housing programs under the Troubled Asset Relief Program.
MBA President and CEO John Courson, in a statement, praised the Administration’s actions.
“As the causes of the problems in the housing market have evolved, it is only right that we should find new workable solutions to help troubled borrowers,” Courson said. “As the industry worked its way through the problem of subprime borrowers who could no longer afford the mortgage they had taken, it became apparent that the emerging challenges lay with borrowers who had lost their jobs or seen a significant drop in household income.”
The forbearance program would extend for a minimum of three months for unemployed borrowers as a first step before qualifying for HAMP. The program also recommends—but not require—that banks and other lenders reduce payments to no more than 31 percent of a borrower’s income.
Last fall MBA formed a task force of its members to look at ways to help those borrowers. In February, MBA presented a proposal to the administration that would enable loan servicers to offer forbearance as part of HAMP, reducing payments to an affordable level for up to nine months for those borrowers who had suffered a reduction in household income.
“We are pleased to see that the administration’s plan incorporates some of the components of that proposal,” Courson said.
The principal reduction plan, through Treasury, would require HAMP servicers to consider the option, but does note require HAMP servicers to implement it. The principal reduction would be earned by the borrower over a three-year period; it would also offer investors incentive to write the principal down.
“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,” Courson noted. “As it relates to the program to offer incentives for principal write downs, 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.”
Incentives to banks, lenders and servicers under the overhaul include a doubling of relocation assistance payments and incentives for immediate write-down of underwater second liens by lenders to encourage write-downs in connection with the FHA refinance program. An extinguishment schedule will be implemented, taking into account the likely distribution of the second lien lenders that agree to immediate write-downs.
Under the FHA refinance program, loans originated under this new program will include a maximum first lien loan-to-value of 97.75 percent. The investor must agree to write down existing loan principal by at least 10 percent. The maximum CLTV is 115 percent, thus allowing second lien holders to resubordinate in some cases.
FHA refinancing would require a minimum FICO score of 500; if required to manually underwrite, the borrower’s debt-to-income cannot exceed 31 percent and borrowers must be otherwise underwritten to FHA standards (including requiring new appraisal). All lenders can participate (not restricted to existing servicers); all existing loan types are eligible for this FHA refinancing, including Fannie Mae/Freddie Mac loans. FHA will adopt the 2MP pay-off incentives schedule if an investor pays off the second mortgage and servicers will receive TARP fund incentives, in which TARP payments will support the greater credit risk associated with these new loans, i.e., FHA foreclosure claims will be paid in part from TARP funds and in part from the FHA insurance fund.
“Taken together, the Administration’s broad housing initiatives and the new flexibilities announced today will offer a second chance to millions of responsible, middle-class American families struggling to stay in their homes and will help to stabilize our households, neighborhoods and communities,” the Administration said.
Article written by: Mike Sorohan – journalist and editor of two electronic publications covering the mortgage banking industry