White House Announces HAMP Expansion and Extension and
Additional Housing Measures
February 7, 2012
On Friday, January 27, 2012, the Obama Administration (the
"Administration") published a paper (the "Plan"), which among other
announcements as outlined below, extended and expanded the Home
Affordable Mortgage Program ("HAMP"). Notably with respect to HAMP,
the Administration announced a series of steps to extend the reach
of HAMP to a broader pool of homeowners, including tenants at risk
of displacement due to foreclosure, and provide more robust relief
to those who participate . On February 1, 2012, the Administration
set forth some details of the Plan for the FHA and GSE
programs.
The non-GSE program provides that any borrower meeting the
following criteria would have the opportunity to refinance:
- current on their loan for the past six months and have
missed no more than one payment in the six months prior,
- a current FICO score of at least 580,
- existing loan is no larger than the current FHA conforming loan
limits in their area,
- refinancing is for a single family, owner-occupied principal
residence, and
- loan-to-value limits which could require lenders interested in
refinancing deeply underwater loans (e.g. greater than 140 LTV) to
write down a portion of the balance of these loans before they
qualify.
The estimated $5-$10 billion cost of the Plan would be paid for
by a fee on the largest financial institutions.
The GSE program consists of a number of elements including:
- eliminating appraisal costs for all borrowers,
- increasing competition so borrowers get the best possible
deal,
- extending streamlined refinancing for all GSE borrowers,
and
- giving borrowers the chance to rebuild equity in their homes
through refinancing.
The Administration believes that the aspects of the Plan
involving the GSEs are within the existing statutory authority of
the FHFA and do not require additional Congressional involvement.
However, because the GSE’s have not acted to implement these
changes, the Administration indicated that it will seek
Congressional action to eliminate appraisal costs by using a
different valuation model, facilitate competition for HARP
participation, and extend streamlined refinancing to all
GSE borrowers.
There has been criticism of the implementation of foreclosure
mitigation programs for some time. A June, 2010 Report of the
General Accountability Office (GAO) concluded that further actions
were needed to fully and equitably implement foreclosure mitigation
programs. GAO Report, Troubled Asset Relief Program: Further
Actions Needed to Equitably Implement Foreclosure Mitigation
Programs.
The Plan includes a number of additional elements:
| 1. |
Establishing a
Home Owner Bill of Rights working with the CFPB that imposes
significant new sets of requirements on servicers. |
| 2. |
Pilot Sale
Initiative to Transition REO Property to Rental Housing to
stabilize neighborhoods and improve housing prices. |
| 3. |
Providing a
full year of forbearance for unemployed workers. |
| 4. |
Establishment
of a Joint Investigation Team to investigate mortgage origination
and servicing abuses. |
| 5. |
Funding for
programs to put people back to work in rehabilitation
projects. |
| 6. |
Expanding HAMP
eligibility. This would include: |
| |
Extending the Administration’s Mortgage Modification
Program for Another Year
HAMP is currently set to expire in December 2012. Under the
proposal, the program deadline will be extended for another year
through December 31, 2013.
Expanding Eligibility to Reduce Additional Foreclosures
and Help Stabilize Neighborhoods
The proposal seeks to expand the eligibility for HAMP in order
to reach a broader pool of distressed borrowers. Additional
borrowers will now have an opportunity to receive modification
assistance that provides the same homeowner protections and clear
rules for servicers established by HAMP. This includes:
- Creating opportunities to extend HAMP
eligibility to those with a first-lien mortgage debt-to-income
ratio below 31% but with additional liens and medical bills, as
well as to non-owner occupied homes. Currently, if a borrower’s
first-lien mortgage debt-to-income-ratio is below 31%, that
borrower is ineligible for a HAMP modification.
- Preventing additional foreclosures by
expanding the program’s eligibility to properties that are
currently occupied by a tenant or which the borrower intends to
rent.
|
| 7. |
Increasing Incentives for Cost-Effective Mortgage
Modifications that Help Borrowers Rebuild Equity in Their
Homes
Currently, HAMP includes an option for servicers to provide
homeowners with a modification that includes a write-down of the
borrower’s principal balance, when a borrower owes significantly
more on their mortgage than their home is worth. These principal
reduction modifications help both reduce a borrower’s monthly
payment and rebuild equity in their homes. To further encourage
investors to consider or expand use of principal reduction
modifications, the Administration will:
- Triple the incentives offered to investors
holding distressed loans to encourage them to participate in
reducing the principal for these loans. Currently, the owner of a
loan that qualifies for HAMP receives between 6 and 21 cents on the
dollar to write down principal on that loan, depending on the
degree of change in the loan-to-value ratio of the individual
loans. Under the new guidelines, Treasury will triple those
incentives, paying from 18 to 63 cents on the dollar to investors,
depending on the degree of change in the loan-to-value ratio of the
individual loans.
- Offer principal reduction incentives for
loans insured or owned by the GSEs. HAMP borrowers who have loans
owned or guaranteed by Fannie Mae or Freddie Mac do not currently
benefit from principal reduction loan modifications. Significantly,
and unlike other programs where the cost is absorbed by the GSE’s,
to encourage the GSEs to offer this assistance to its underwater
borrowers, Treasury has notified the GSE’s regulator, the FHFA,
that Treasury will pay principal reduction incentives to Fannie Mae
or Freddie Mac if they allow servicers to forgive principal in
conjunction with a HAMP modification.
|
Six Significant Observations
| 1. |
The Plan comes
at a time of increasing conflict between the FHFA and the
Administration. This is highlighted in the continued tension
between the FHFA mandated GSE loss mitigation and "preservation and
conservation of assets" efforts and those public policy efforts
which the Administration and others believe are necessary to help
address the housing crisis. The FHFA recently released an analysis
of principal forgiveness as a loss mitigation tool which questioned
the effectiveness of principal forgiveness as a loss mitigation
tool. The FHFA’s Statement on January 27, 2012 responding to the
announcement of the Plan did not endorse the Plan or commit to
implement it. In January, the Federal Reserve Board issued a white
paper which concluded that the FHFA’s loss mitigation efforts were
having a negative impact on the housing recovery and that the GSE’s
need to do more in the way of mortgage modifications and
foreclosure prevention efforts in order to stabilize housing prices
and keep people in their homes. |
| 2. |
The imposition
of new and enhanced borrower protection and outreach programs by
the CFPB, in addition to making foreclosure increasingly more
difficult, will add to the already burdened servicing industry
which is straining under the pressure of national settlement
attempts over servicer abuses and foreclosure related
litigation. |
| 3. |
The Joint
Investigation Task Force will mean a significantly increased level
of enforcement actions and prosecutions - especially in the
servicing area. |
| 4. |
Servicers
should conduct their own assessment and compliance audits of their
practices and procedures in advance of action by the CFPB and the
Joint Investigation team to prevent or mitigate enforcement
action. |
| 5. |
As noted, the
estimated $5 to $10 billion cost of the Plan would be financed by a
new fee on financial institutions. This controversial fee idea was
previously proposed by the Administration and widely criticized in
Congress. The Plan’s reliance on a fee that is highly unlikely to
become law has led many observers to suggest that the Plan was
offered to influence the November elections, and not as a serious
policy proposal. |
| 6. |
Nonetheless,
if the proposed "big bank tax" somehow managed to be adopted to pay
for this program, it would represent another increased cost of
doing business, that, taken together with capital increases and
surcharges and enhanced liquidity requirements, would make it
increasingly difficult for banks to achieve adequate return on
equity for shareholders. |