Can Obama’s Mortgage Modification Program Save Your Home?

09 Jun Can Obama’s Mortgage Modification Program Save Your Home?

The Home Affordable Mortgage Modification Program called HAMP, andthe companion home refinance program (HARP) applicable to loans held or securitized through Fannie Mae and Freddie Mac, are touted by the Obama Administration as having the potential to help up to nine million homeowners.

On paper at least, both programs seem to have features providing real relief from abusive mortgage terms and unaffordable payments. As an alternative to bankruptcy or as part of a Chapter 13 plan, HAMP could provide the homeowner with protections roughly comparable to those under the proposed Helping Families Save their Homes in Bankruptcy Act under some sets of circumstances, but not under others. The primary difference between judicial modification in bankruptcy and the Obama plan is the requirement of voluntary lender participation.

The HARP program is limited in scope. It releases Federal funds to refinance existing mortgages that are current in repayment and do not exceed the market value of the house. It is aimed at homeowners who would have been able to take advantage of current lower interest rates if the fall in property values had not eroded their equity. Refinancing under HARP does not affect the total amount due on the mortgage, it only provides more favorable loan terms.

Savings to the homeowner with these programs are modest. As long as interest rates remain low and the homeowners do not default, there is no significant cost to the taxpayer. However, when one eliminates those people whose homes are seriously under water, those whose incomes will not support the modified payments, and those who would not realize enough savings to make refinancing worthwhile, the pool of potential HARP applicants is much curtailed.

HAMP has more potential benefits but there are many potential roadblocks to relief for the homeowner. Under this program, homeowners faced with foreclosure or unaffordable payments due to income reduction can modify a mortgage with their existing lender, provided the lender agrees to the modification.

Key features of HAMP are a provision to put a portion of the principal into forbearance to reduce payments, a payment target of 31% Debt to Income ratio (DTI) regardless of balance, and direct government subsidies to both lenders and homeowners.

These programs show considerable overlap with the Hope for Homeowners Act, a foreclosure prevention tool that went into effect October 1, 2008, and has found few applicants (fewer than 100 as of January, 2009). HAMP applicants are required to consider the HOPE program, and it is not clear which program applies if a person is eligible for both.

For the lender, participation in HAMP is optional, but required as a condition of receiving future bailout funds. Once enrolled, a lender must consider all borrowers who request it. However, an enrolled lender is required to modify the mortgage only if allowed by the applicable pooling and servicing agreement, and only if the net present value (NPV) after modification exceeds the pre-modification NPV. This creates additional loopholes.

As of March 27 2009, more than a month into the program, no lender had enrolled. However, administrative difficulties with the program may be responsible for this poor showing. Given the uncertainties about implementation, timing, and eligibility, a homeowner who has received a foreclosure notice would be well-advised to consider filing for Chapter 13 bankruptcy to stop a pending foreclosure, anticipating that it may well be possible to either incorporate or substitute HAMP (or an as-yet unimplemented change in the laws) during the course of the plan.

The cost to the government, and ultimately the taxpayer, is potentially large if many people qualify for subsidies. There are also concerns about how the program would operate if continuing high employment produces a rash of defaults on the modified mortgages, or if the economy enters an inflationary phase and home values start to rise again.

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I was admitted to practice in 1978. I am certified as a Consumer Bankruptcy Specialist by the American Board of Certification. I regularly speak on tax and bankruptcy issues at state, regional and national conferences. Years of experience in practice before the Internal Revenue Service and Oregon Department of Revenue have given me the background to resolve a large variety of consumer tax issues.
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