Details of HAMP Improvements and New FHA Refinance Program

by devteam March 26th, 2010 | Share

Today, as part of its ongoing commitment to continuously improve housing relief efforts, the Obama Administration announced adjustments to the Home Affordable Modification Program (HAMP) and created a new Federal Housing Administration (FHA) principal write down program.

Here is a rundown of the details….

HAMP Improvements

1. Temporary assistance for unemployed homeowners while they search for re-employment

  • Mortgage payments reduced to affordable level for a minimum of three months, and up to 6 months for some borrowers, while eligible homeowner looks for new job. Via forbearance, month housing payment is set at 31% of monthly income while borrower is unemployed. A temporary assistance plan to be offered to unemployed borrowers. Servicers required to offer assistance to unemployed borrowers who meet specific criteria. Treasury says forbearance will not cost taxpayers anything.

2. Requirement to consider alternative principal write-down approach and increased principal write-down incentives

  • All servicers required to consider alternative modification approach that emphasizes principal write-down for HAMP eligible borrowers who own more than 115% of current appraised home value.
  • Pay for Success Structure: Alternative principal reduction allows some underwater homeowners to reduce principal balance of their mortgage in steps over three years, if they remain current on payments.
  • Servicers will initially treat the write-down amount as forbearance and will forgive the forborne amount in three equal steps over three years, as long as the homeowner remains current on payments
  • For borrowers who have already received a permanent modification, or who are in a trial modification, and are still current on payments at the time the alternative modification approach is operational (later in 2010), servicers will be required to retroactively consider extinguishing an amount of principal balance in the same amount that would have been forgiven under the new alternative approach.
  • Increased incentives to servicers and lenders, including increasedincentives for extinguishment of subordinate liens, to encourage moreshort sales and other alternatives to foreclosure

3. Improvements to reach more borrowers with HAMP modifications

  • Improvements to borrower solicitation requirements including clear performance time frames for both servicers and borrowers
  • Borrowers in active bankruptcy must be considered for HAMP upon request. Allows use of bankruptcy documents to verify income.
  • Requires servicers to stop foreclosure actions after a borrower entersinto a trial plan based on verified income.
  • Allows waiver of the trial period in some cases were a borrower isalready performing under a bankruptcy plan.
  • Expansion of HAMP to include homeowners with FHA loans

4. Helping homeowners move to more affordable housing

  • Double relocation assistance payment for borrowers successfully completing foreclosure alternative to $3,000
  • Help homeowners who use a short sale or deed-in-lieu to transition more quickly to housing they can afford.

Q: When will homeowners begin to receive help under the newHAMP enhancements?
It will take time to get these new program enhancements up and running.Some pieces, such as increased payments for alternatives toforeclosures, will be put in place in the coming weeks. We anticipatethe full set of programs to be available by the fall.

Consumers: HERE are Frequently Asked Questions

New FHA Refinance Option for Underwater Loans

Here are the essentials of the program:

  • Voluntary for Lenders and Borrowers. Because lenders MUST AGREE to principal write-downs, not all underwater borrowers who meet criteria below will receive an FHA refinance loan.
  • Mandatory Principal Write Down: Lenders must write down at least 10% ofthe principal of the original first mortgage. FHA expects the averageprincipal write-down to be significantly more than that.
  • New appraisal must be obtained. After principal write down, the new loan to value can be no higher than 97.75%.
  • 2nd Mortgage holders must agree to resubordinate and write off any principalamount over 115% of current LTV
  • Option is available to homeowners with mortgages not currently insuredby the FHA. Existing FHA-insured borrowers are NOT eligible.
  • As with any loan forgiveness, this short refinancing should be reflectedrn as a negative feature on a borrower’s credit score.

Homeowner Eligibility

  1. Must be current on existing mortgage.
  2. Must occupy the home as their primary residence
  3. Must qualify under current FHA underwriting regs (after principal write down). FICO score cannot be below 500. Front Ratio 31%/Back Ratio 50%
  4. Existing lender must agree to principal write down

To incentivize lenders and servicers to cooperate with principal write downs TARP funds will be made available up to a total of $14 billion. TARP funds will be used to provide coverage for a share of losses on loans up to a specified amount. The FHA will provide remaining loss coverage up to the maximum insurance coverage. Thus, the new lender will have a loan that is backed by the United States for up to 97.75 percent of the home value, as with other FHA refinance loans

HERE is the FHA Refinance Fact Sheet

Q: When will the FHA Refinance loan be available to underwater borrowers?
FHA will move to implement this as quickly as possible and expect that lenders can begin making decisions by the fall. Specific guidelines will be posted in a FHA Mortgagee Letter in the near future.

Treasury estimates these changes will help 3 to 4 million more strugglinghomeowners through the end of 2012 (FHA estimates might be a bit high).  Costs will be shared between theprivate sector and the Federal Government. The Federal cost of thesechanges will be funded through the $50 billion allocation for housingprograms under the Troubled Asset Relief Program (TARP).  Banks, theprivate sector, will be forced to write down principal losses (with helprn from the government).

Plain and Simple: the updates made to HAMP are a big step in the right direction. While the new FHA Refinance program has good intentions,  I am not so confident it will be too effective at this point.




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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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