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“MAKING HOME AFFORDABLE” GUIDELINES

 

“MAKING HOME AFFORDABLE” GUIDELINES

Updated:         June 4, 2018

The Making Home Affordable program has been revised numerous times. It has also been renewed several times when it was due to expire. Currently it is anticipated that it will expire for good this December 31, 2018. The program has assisted several million borrowers and have perhaps frustrated just a many as it has experienced many criticisms over its life period. The following is provided as insight for those wo might yet take advantage of the program this year and to also provide a historical look at how the Government attempted to resolve the problem of many borrowers following the 2008 recession.

Upon expiration, Fannie Mae is rolling out a new 97% Loan-to-Value ratio product that is designed to help equity strapped borrowers. We are awaiting the details of the new program.

 

Note:   Some aspects of the program are likely to have been modified or even no longer be available to borrowers seeking assistance now.

Home Affordable Refinance Program (HARP)                                                          

The language describing this program upon its initiation was “Designed for eligible homeowners who are current on their mortgages but have been unable to take advantage of today’s low interest rates because their homes lack sufficient equity due to loss of value.” The objective is to help homeowners obtain more stable and/or affordable loans.

Thus, this program is available to homeowners who have a solid payment history on an existing Fannie Mae or Freddie Mac loan. The anticipation is that those borrowers who have been prohibited from refinancing because their current loan-to-value ratio exceeds 80% will now be eligible to refinance at today’s lower rates. (If interest rates increase, as some are predicting, this refinance option may become less desirable)

 The expectation is that because the lenders and servicer already have the borrower’s information on file, less documentation will be required in the new refinance transaction.

This reduction in documentation along with the expectation that an appraisal will be able to be waived is expected to make a refinance quicker and less costly for lenders and borrowers.

 The plan relies upon the voluntary cooperation of the lenders and seems to allow each lender the latitude to determine the credit worthiness of the borrower and other aspects of each refinance request.   Nor do we have a clear idea of the evaluation process and there seems to be a lack of consistent interpretation of the guidelines, adopted by all lenders.    (It may be reasonable to assume that many borrowers may be deemed ineligible and thus we can expect that short sale transactions may continue.)

Following are the guidelines for eligibility.

·         Loans originated on or before January 1, 2009 and currently owned or guaranteed by Fannie Mae or Freddie Mac.

·         First liens on owner occupied properties only whose current lien does not exceed 125% of the current market value.

·        Conforming loan limits although the higher limits up to $729,750 in designated communities are allowed.

·        Full documentation of income and assets required. The guidelines for qualification seem to be left up to the lender performing the refinance. (Vague guidelines would seem to allow lender to make arbitrary decisions that can not be easily refuted by consumers).

A homeowner obtaining a loan under the Home Affordable Refinance Program (HARP) will be required to pay points and fees similar to any refinance transaction. If the borrower has both a first and second loan, the refinance will affect only the first mortgage. The second lien holder must agree to remain in the junior lien position and the borrower is only obligated to qualify for the first loan refinance. (Most feel that it is unlikely that junior lien holders will cooperate in this arrangement).

Home Affordable Modification Program (HAMP)                                                (Program is set to expire December 31, 2012)

This portion of the program has received the most attention and seems to have the more developed guidelines. Designed to reach “at risk” borrowers and modify loans into more affordable payment schedules. (It is also the portion of the program that has created the most frustration for homeowners with the often extraordinarily long time frames for accomplishing a modification. Too often, homeowners feel that they are strung along for a long period of time only to be denied a modification.) Following are the guidelines for eligibility.

·         Loans originated on or before January 1, 2009

·         First liens on owner occupied, one to four unit properties

·         Conforming loan limits although the higher limits up to $729,750 for single family homes in designated communities are allowed

·         Full documentation of income and assets required accompanied by an sufficient documentation of financial hardship is required. (While hardship can be identified as an increasing payment or rate adjustment making the payment unaffordable, lenders seem mostly to be looking for job loss or other reduction in income or medical complications as the main reasons for the sudden hardship.)

·     Borrowers who have not missed payments but who are at imminent risk of default are to be targeted. The borrower who is delinquent in payments seems ineligible under the guidelines. (Unfortunately, many borrowers in the beginning were previously instructed that they were ineligible for assistance until they were delinquent. Then, those same borrowers were told that because they stopped making payments, in an effort to qualify for help, that they were no longer eligible. Better communication has hopefully resulted in less disappointment))

·       The monthly payments, including PITI and any PMI, will be reduced to no more than 31% of the borrower’s gross monthly income. (As an incentive to participate,the lender will be reimbursed by the government for the cost of the reductions in monthly payments from 38% DTI to 31% DTI.) 

·         The modification sequence requires first the reduction of interest rate with a floor of 2% and then extending the term to a maximum of 40 years. Then, if necessary, a principal forbearance could be initiated.

·    Participating servicers are to use reasonable effort to contact homeowners facing foreclosure and are not to refer a loan for foreclosure until the borrower has been evaluated for HAMP.

·    When deemed eligible for a modification, most homeowners are offered a “trial” modification for three months, after which the modification may be made permanent if the borrower has made all payments on time and the originally provided income and expense documentation is determined to be accurate. (Some homeowners have complained that in spite of their following all the guidelines of the trial modification they have bee denied permanent modification.)

·         Loans can be modified only once (this was in response to the criticism that previous modifications were insufficient to provide real relief and were for only a short period of time) 

One major concern already identified with the process has to do with the requirement that servicers conduct a “net present value” calculation. Translated, this means that the servicer will compare the cost of a loan modification with a foreclosure and will implement whichever option provides the lesser cost or loss to the lender. (The net present value is non-transparent, meaning that the numbers used to make the calculations are presently available only to the servicers.)

There has been confusion regarding because some loans were deemed unavailable for modification because the servicer was unable to proceed. The problem resulted from the original bundling of loans into Mortgage Backed Securities and globally sold to investors. The servicer in most cases does not “own” the loan but must acquire permission to proceed with any action with or against the borrower. Most contracts allow servicers to proceed as long as the modification provides a better financial outcome for the lender or investor than the status quo. In some cases, it was difficult to determine the servicer’s authorization and delays occurred while determining if the servicer could actually offer a modification.

Here are several additional conditions accompanying loan modifications:

-          all modifications must include an impound account for taxes and insurance          - if mortgage insurance was required in the original loan, it will be continued        - the interest rate on the modified loan will be fixed for life unless your initial  modified rate is below the current market rate. In such a case, the rate will be fixed for 5 years after which it is subject to an annual increase of 1%  until it reaches the market rate that prevailed on the day of the original agreement, at which time it will be fixed for life.                                                                            

While many homeowners are severely “under water” (the principal owed exceeds the current value of the home), lenders have been reluctant to offer a principal forbearance (where the amount owed is put off until the future). Should such a forbearance occur, the amount owed will be ultimately owed and will likely result in a balloon payment at some time in the future. (Many homeowners, depending upon how much over the current home’s value is owed, may never recapture the lost value. In such cases, the borrower may remain under water when they attempt to liquidate their home in the future. If home values have not rebounded significantly during that same 5 year period, home owners may have found that they only postponed a problem rather than having found a solution. It is possible that they will merely be renting their homes and still encounter no way to avoid a short sale in the future with its resulting negative impact to their credit, etc. It is easy to see why some homeowners are abandoning their homes now to foreclosure or short sale with the conclusion that they will be able to join the homeowner ranks again in four years when their credit has recovered from the current negative impacts.)

Home Affordable Unemployment Program (UP)

One of the main additions to the Home Affordable Programs is the introduction of an option for those homeowners who are unemployed.  This new option provides a temporary time (forbearance) during which the regular monthly payment is reduced or suspended. The eligibility requirements remain mostly the same as for the HARP and HAMP programs. The additional eligibility requirements include:

            ·    The borrower must request consideration for UP before three full mortage payments are due or unpaid.

            ·    The borrower must be unemployed and able to document the s/he will receive unemployment benefits in the month in which the forbearance period begins.

            ·    Some servicers are requiring that the borrower receive unemployment benefits for up to three months prior to the forbearance period beginning.

The forbearance period is described as being available “for at least three months” but can be extended, depending upon the servicer and their specific guidelines. The expectation is that during the forbearance period, the monthly payment will be reduced to no more than 31% of the gross monthly household income although the payment could be reduced more or suspended entirely. The UP program anticipates that at some time, the borrower will be re-evaluated regarding his/her eligibility for HAMP. (Is it reasonable to assume that with rare exception, one who remains unemployed is unlikely to be able to meet the HAMP guidelines?With the average unemployment time frame now stretching many months, a possible three month limitation for the UP assistance may be ineffectual. While the program calls for the assistance to last “at least” three months, the process for re-evaluation and extension do not seem well defined.)

Home Affordable Foreclosure Alternates Program (HAFA)

This part of the program deals with the Foreclosure, Short Sale and Deed-In-Lieu options offered by lenders. The frustrations accompanying all of these options are well documented. Interestingly, in spite of all of the emphasis on the above options, it is predicted that 1.4 million foreclosures will occur in 2011. (It would seem that something isn’t working with all of these offered alternatives. In spite of the relatively poor results achieved by the above efforts in the past, government seems to be promoting the same programs while predicting failure for 1.4 million homeowners . . . the classic definition of insanity where one continues doing the same thing but hoping for a different result.)

Judicial Modification at Bankruptcy

Provisions initially introduced an option for homeowners seek a debt payment plan via bankruptcy. With evidence that the borrower had tried unsuccessfully to obtain an affordable loan modification, a bankruptcy judge would be enabled to reduce the outstanding principal balance to the current fair market value to facilitate the borrower’s retention of his/her owner occupied home. Known as a “cram down” provision, lenders were understandably opposed to the ruling. Their resistance was based on the supposition that the number of bankruptcies will increase dramatically. Proponents, pointed out that bankruptcy was a last choice situation and would encourage lenders to work with borrowers in seeking loan modifications. The banks won and this provision, while still be discussed, has not been adopted as a potential final resolution for desperate home owners.

Why Wouldn’t This Work?

Why must a homeowner wait until s/he is in imminent danger of losing a home before s/he can seek assistance? How many homeowners would be helped today if their current lender would allow a refinance up to 125% LTV of the current value? Taking advantage of lower rates to reduce monthly payments might reduce the number of homeowners who are ultimately forced to seek more drastic help via the above options. Clearly there are considerations, among them the concern that refinancing homes so far under water in value might still be merely postponing a problem when the owner seeks to liquidate the home in the future. But, for homeowners anticipating long term tenancy, being able to reduce their payments to a more affordable level could be the thing that keeps them in their homes. Just an idea!

Other provisions

The total legislation is lengthy and has other provisions included. There are elements to strengthen FHA, Fannie Mae and Freddie Mac in their ability to intervene with at risk borrowers. There are outlined provisions for borrowers with high total debt ratios who can seek HUD certified consumer counseling and a debt reconstruction program along with their loan modification.  Incentives for lenders and servicers are spelled out in the legislation along with expectations regarding how PMI companies will assist in the modification process. While a very ambitious program, we continue to wait to see if it will actually help many troubled homeowners.

A good start

In spite of the limitations to the programs noted above, there was anticipation that the refinance and modification programs set out above would help millions of projected borrowers. Keeping home owners in their homes was a big step towards establishing some stability to the housing segment of the economy. (Note: In spite of the constant tweaking of the regulations, the number of homeowners assisted remains a disappointing minimum number)

Word/HAR Webpage/Making Home Affordable