The expansion of HAMP to pay more for principal write down and to specifically pay the GSE’s may actually move that needle (The story below gives some greater detail). The latest announcement still makes principal write down optional, and does not add more to the budget as this change repurposes already accounted for TARP funds, but the added incentive and expanded use may motivate more activity in the program.
The subject of principal write down provokes much debate amongst stakeholders with some against based on moral hazard, fairness, and role of government concerns. Others feel that the housing market and the economy cannot get back on track without more use of principal write downs. Experts like Laurie Goodman of Amherst Securities and Mark Zandi of Moody’s have been vocal about the need for principal write down especially in states that are severely underwater such as Nevada and Florida.
Regardless of view, we now will see if this motivates the GSE’s to participate. Remember, it remains voluntary and so far FHFA has said that they will not allow the GSE’s to participate in principal write down programs offered by the administration.
Obama administration expands foreclosure prevention program
By Les Christie @CNNMoney January 27, 2012: 7:56 PM ET
NEW YORK (CNNMoney) — The Obama administration is taking another swing at improving its main foreclosure prevention program.
The administration said it was expanding eligibility for its Home Affordable Modification Program, known as HAMP, to borrowers with higher debt loads and tripling the incentives it pays banks that reduce principal on loans.
The administration also said it would offer incentives to Fannie Mae and Freddie Mac to reduce principal on loans. Previously, the government had only offered incentives to private lenders and banks. The program was also extended to December 2013. It was initially set to expire at the end of this year.
The changes were announced in a joint press conference held by Housing and Urban Development Secretary Shaun Donovan, Assistant Treasury Secretary Tim Massad, and White House National Economic Council Director Gene Sperling on Friday afternoon.
Originally designed to help some 4 million mortgage borrowers when it was first introduced in February, 2009, HAMP has helped fewer than 1 million homeowners.
Has Obama’s housing policy failed?
With these changes, HAMP is turning into an “all of the above strategy to help responsible homeowners lower their costs and stay in their homes,” said Gene Sperling, the Director of the National Economic Council, who also took part in the press conference.
Here’s a rundown of the new changes:
Expansion of eligibility: HAMP was designed to bring the debt ratio of mortgage borrowers down to 31% of their incomes. Those whose mortgage payments were already below that level had been ineligible for a modification. They may qualify now. The new guidelines will allow for a more flexible approach that takes other debt into account when calculating debt-to-income ratios.
Extension of eligibility to owners of rentals properties: The old HAMP rules applied solely to owner-occupied homes but now those who own rental properties may also qualify for a HAMP modification.
Triple balance-reduction incentives: The new HAMP will pay between 18 cents and 63 cents for every dollar that lenders take off the mortgage principal, up from between 6 cents and 21 cents.
Pay Fannie and Freddie the same incentives: Currently, Fannie Mae and Freddie Mac do not offer principal reduction plans as part of their HAMP modifications. To encourage this assistance, Treasury said it will pay the same principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.
While the new changes could greatly expand the number of homeowners that receive help from HAMP, it could invite controversy. Subsidizing real estate investors with taxpayer money in a time of rising rents doesn’t makes much sense to Anthony Sanders, a real estate professor at George Mason University, for example.
Yet, HUD Secretary Shaun Donovan said that it doesn’t matter whether the house next door to you is occupied by a tenant or an owner.
“If the house goes vacant, the value of your house goes down $5,000 or $10,000 that day,” he said. “These are major problems for homeowners.”
Following the press conference, the Federal Housing Finance Agency, which oversees Fannie and Freddie, issued a statement that said it would consider the changes to the HAMP program.
However, it noted that an analysis it recently conducted found “that principal forgiveness did not provide benefits that were greater than principal forbearance,” signaling that the housing authority may not support reducing the principal on loans as a way to help homeowners.
No new funds need be allocated for HAMP’s expansion. Since less than $10 billion of the $29 billion set aside for the program has been spent so far, said Timothy Massad, Assistant Secretary for Financial Stability at the Treasury Department. The administration would not hazard a guess at how many more borrowers the expanded program would help.
Foreclosures: America’s hardest hit neighborhoods
The changes in HAMP do not take effect until the end of April, but a Treasury spokeswoman said any struggling homeowners should reach out and seek foreclosure prevention counseling immediately. That way, they can learn their options, which could include trying to hold on until the new HAMP is ready.
Find homes for sale
First Published: January 27, 2012: 5:10 PM ET