HAMP Changes: Treasury Increases Incentives for Principal Reduction

The Federal Housing Finance Agency announced on Friday that it was extendingrnthe Home Affordable Modification Program (HAMP) for another year – through Decemberrn13, 2013 – and that Freddie Mac and Fannie Mae would continue as financialrnagents for Treasury in implementing the changes it then announced.  The press release also said the two GSEsrnwould “extend their use of HAMP Tier 1 as the first modification option throughrn2013” and that they were already in alignment with HAMP Tier 2 and no furtherrnchanges were necessary.</p

However, the Treasury Department, which jointlyrnadministers HAMP, simultaneously announced what appear to be some significantrnchanges in the program.  Perhaps Timothy G. Massad, Assistant Treasury Secretaryrnfor Financial Stability, was merely providing the English translation ofrnthe FHFA press release or perhaps there is a division in the ranks.  In either case, here is the information hernprovided in his blog posting.rn </p

The Treasury Department intends to triple the incentives offered torninvestors holding distressed loans to encourage them to participate in reducingrnthe principal for those loans.  Under thernnew guidelines, Treasury will pay from 18 to 63 cents on the dollar torninvestors, depending on the degree of change in the loan-to-value ratio of thernindividual loans.</p

While principal reduction has always beenrnavailable for modifying proprietary loans under the HAMP program (it even hasrnits own acronym, PRA) it has not been widely used.  Of over 900,000 permanent modificationsrncompleted since the program began, only 38,300 are classified as utilizing principalrnreduction. 

As we have previously reported,rnFHFA has resisted all suggestions that the GSEs also include principal reductionrnin their tools for dealing with distressed loans where borrowers are upsiderndown in their mortgages.  According tornMassad, Treasury has notified FHFA that it will pay principal reduction incentivesrnto Fannie Mae or Freddie Mac as well if they allow servicers to forgive principalrnin conjunction with a HAMP modification. rn</p

In its press release FHFA said of thernTreasury proposal:  </p

“FHFA hasrnbeen asked to consider the newly available HAMP incentives for principalrnreduction. FHFA recently released analysis concluding that principalrnforgiveness did not provide benefits that were greater than principalrnforbearance as a loss mitigation tool. FHFA’s assessment of the investorrnincentives now being offered will follow its previous analysis, includingrnconsideration of the eligible universe, operational costs to implement suchrnchanges, and potential borrower incentive effects.” </p

Again,rnaccording to Treasury, HAMP will be expanding its eligibility to reach arnbroader pool of borrowers.  An additionalrnevaluation process is being implemented that will allow servicers to recognize thatrnsome borrowers who can afford their first mortgage payments still struggle becausernof other debt.  Some analyses of HAMPrnhave found that many borrowers could not qualify for a modification solely becauserntheir housing expenses were already below the 31 percent ceiling allowed byrnHAMP guidelines.  This ceiling will nowrnbe flexible enough to include secondary debt such as medical expenses or secondrnliens in the evaluation ratio.  </p

Eligibilityrnwill also be expanded to include properties that are tenant-occupied as well asrnvacant properties that the owner intends to rent.  According to Massad, this will serve tornfurther stabilize communities with high levels of vacant and foreclosedrnproperties as well as expanding the rental pool as has been suggested by thernFederal Reserve and others.

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