By: Michael Powers
The U.S. Treasury has extended HAMP (The Home Affordable Modification Program) through 2015, seemingly giving more homeowners an opportunity to avoid foreclosure and take advantage of the program. But the whole story reveals that the extension offers a greater opportunity to lenders than to homeowners.
It is estimated that HAMP has helped some 1.6 million homeowners, falling far short of the more than 10 million homeowners it was designed to reach. In addition, many of those “helped” by the programs ultimately lost their homes, but were at least given a graceful exit strategy through “short sale” and “deed-in-lieu” foreclosure alternatives. But is the shortfall due to defects in the program itself? Not hardly.
The program began in 2009 with the hope of helping millions of U.S. homeowners stuck in unaffordable loans, and staving off preventable foreclosures. The program offered monetary incentives to participating lenders, and lender participation was voluntary. In reality, lender’s generally participated in the elements of the program that benefited them, and not necessarily the homeowner.
The program prescribed a “waterfall” procedure, which consisted of taking a series of steps in order to make a homeowner’s mortgage payment equal 31% of their income. Step one was capitalizing any arrears, which increased the principal balance of the loan. Step two was the reduction of a loan’s interest rate to as low as two percent. If this step failed to reach the target payment, the loan term was stretched to 40 years, as opposed to a traditional 30 year mortgage. If this third step still fell short of the target payment, a “principal forbearance” was prescribed as step 4 to finally reach the target payment.
Well, step 4 was where the program failed, or should we say, where lenders failed the program. Lenders almost universally rejected the “principal forbearance” element and instead either denied the modification or moved the homeowner into their own proprietary loan modification programs, which had far less stringent guidelines and generally benefited the lender more than the homeowner. Accordingly, re-defaults soared, as loan modifications were often not meaningful enough to create a long term solution to the problem. In some cases, the process actually resulted in a higher mortgage payment for the homeowner, as arrears were added to the principal balance.
In June, 2012, the HAMP Program saw some dramatic revisions. Having become clear that principal reductions were the missing element to HAMP success, incentives were as much as tripled for investors willing to grant a principal reduction. Since that time, many attorneys and other industry insiders report a dramatic shift in principal reductions and more meaningful modifications that would have a greater chance of long term success.
So, who is the extension really helping? On the surface, the extension seems to help both lenders and homeowners alike. Homeowners now have a greater chance of receiving a meaningful, lasting loan modification through the HAMP program and lenders have greater incentives to participate. Unfortunately, that is only part of the story.
The fact is that many states have passed aggressive legislation to protect the rights of homeowners and hold lenders accountable for the unbridled mortgage fraud which created the mortgage crisis. In states like California, for example, the Homeowner Bill of Rights gives homeowners the upper hand in negotiations with their lender. These legislative measures have made lenders subject to lawsuits which would be far more costly that giving a homeowner a meaningful modification. Accordingly, many homeowners are now pursuing individual litigation against their lender. In many cases, the outcomes of those cases make a loan modification seem insulting.
So, what’s the moral of the story? If your lender is offering you a seemingly generous loan modification, it is most likely because they are trying to dissuade you from filing a lawsuit in which they stand to lose even more money. The best way to understand your options is to consult a foreclosure attorney before considering any loan modification offers from your lender.