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Principal Reductions: A Cure to the Crisis?

April 12, 2012 Leave a comment

After much debate, Fannie Mae and Freddie Mac will decide by the end of this month whether they will allow principal reductions on mortgages they back.

Fannie and Freddie have resisted calls to write down the balances on the loans in their portfolio, saying it would be too costly for taxpayers as the mortgage giants are government-controlled companies, regulated by The Federal Housing Finance Agency.

At the core of the debate is Ed DeMarco, acting director for the agency, who has said principal reductions would amount to an expensive taxpayer bailout of troubled homeowners. According to CNNMoney.com, the agency had originally decided against allowing principal reductions after internal studies showed that alternatives such as adjusting monthly payments or forbearing principal were more cost effective.

The Obama administration, however, has tripled the incentives it will pay to Fannie and Freddie for reducing principal under the Home Affordable Mortgage Program, or HAMP and has forced the agency to reconsider.

As reported on CNNMoney.com, Fannie and Freddie have about 3 million loans that are seriously underwater, according to company filings. But three-quarters of these homeowners are current on their payments and may not qualify.

The number of eligible underwater Fannie and Freddie loans could range from a few hundred thousand up to 750,000, according to estimates – a fraction of the total 11 million underwater borrowers in the U.S.

However, there is still debate on if this will fix the housing crisis.

While some economists state that this could be helpful in aiding the crisis, some experts still fear that allowing principal reduction will open a new wave of strategic defaults, where homeowners decide to stop paying their mortgages in order to benefit from modification programs.

Plus, at the end of the day, taxpayers will still be paying for principal reductions – whether taxpayer money comes from HAMP or from the open line of bailouts Treasury provides to Fannie and Freddie.

Changes to HAMP Can Help You Avoid Foreclosure

February 1, 2012 Leave a comment

The Obama administration is taking another swing at improving its main foreclosure prevention program, expanding eligibility for its Home Affordable Modification Program (HAMP) to borrowers with higher debt loads. It will also triple the incentives it pays banks that reduce principals on loans.

The program, which was initially set to expire at the end of this year, has also been extended to December 2013. Additionally, the administration will also offer incentives to Fannie Mae and Freddie Mac to reduce principal on loans which previously was only offered to private lenders and banks.

According to CNN Money, the changes to HAMP which were announced last week at a press conference, include:

  • 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.

The changes to HAMP do not take effect until the end of April, but the Treasury recommends any struggling homeowners to seek foreclosure prevention counseling immediately to learn their options and determine their best course of action.

Tired Of Getting The Run-Around By Banks, You’re Not Alone

December 14, 2011 2 comments

JP Morgan ChaseThe Obama administration is keeping a close eye on banks who aren’t doing enough to help this foreclosure crisis, saying it will keep the pressure on two big U.S. banks to help more troubled borrowers from losing their homes.

According to the Chicago Tribune, The Treasury said Bank of America and JPMorgan Chase & Co need to improve their loan modification efforts to merit the financial incentives the administration’s housing rescue program provides to mortgage servicers.

JPMorgan is at risk of permanently having support reduced if it does not make substantial improvements in time for the first quarter of 2012, the Treasury said. They are doing a poor job helping people permanently lower their mortgage payments and have been cited for rejecting people who were eligible for mortgage modifications three separate times since June.

Under The Treasury’s Home Affordable Modification Program, known as HAMP, mortgage servicers receive incentives to rewrite loan terms to reduce monthly payments for struggling borrowers. Servicer assessments are instrumental in the Treasury’s efforts to hold servicers publicly accountable for their performance and keep necessary pressure on them to improve.

The Treasury began issuing updates on the 10 largest mortgage servicers in June, assessing how the companies reached out to troubled borrowers and carried out loan modifications. Since then, Wells Fargo and Ocwen have made improvements in implementing mortgage modifications and were removed from Treasury’s watch list.