Thursday, June 10, 2010
Freddie/Fannie – Modification Now Possible for Higher Income Households
The Home Affordable Modification Program (HAMP) was created to provide struggling homeowners the opportunity to avoid foreclosure and formulate more affordable payments by modifying or refinancing their mortgage. Program guidelines provide a maximum reduction in monthly mortgage payments to 31 percent of the borrower's monthly income. However, Fannie Mae and Freddie Mac have started modifying loans for borrowers whose payments do not exceed 31 percent of their monthly income. Some of these borrower's mortgage debt constituted as little as 20 percent of their monthly income.
These more fortunate borrowers have received these benefits, despite the HAMP guidelines, courtesy of "backup plans." Backup modifications are designed for borrowers who make the requisite three trial payments but did not receive permanent modifications because their debt-to-income ratio is less than 31%. Critics of these backup strategies claim that allowing borrowers with the ability to pay their mortgages to benefit from HAMP could provide an incentive for other non-struggling consumers to seek aid. Because so many borrowers are struggling to some degree and would like a reduction in their mortgage payments, potentially every borrower could be asking for a reduction.
In response to these criticisms, government-sponsored enterprises and advisors of the Federal Housing Finance Agency (FHFA) have stressed that a borrower's mortgage debt is just one factor in determining financial distress. Many times the borrower's debt as a whole, not the mortgage debt by itself, is the source of the problem. Although some borrowers may be paying a smaller percentage of their income towards their mortgage, it is hardly fair to categorize a borrower as able to pay when their total monthly debt obligations are reserving more than 70% of their income.
In addition, it has been determined that these lending organizations would lose more of the taxpayer's money by foreclosing than by working with the borrowers. FHFA advisors have stated that a modification may result in a 10% loss while foreclosures result in a 50% loss at minimum.
The Treasury Department did not initially require borrowers to verify their income before the 3 month trials so many borrowers who entered the program don't qualify and are now slowly being eliminated. An estimated 277, 640 trial modifications have been eliminated. Less than 1 million of the applicants qualify for the backup plans and the plans are only available to those who participated in trial modifications prior to March 1st, and as of April the number of borrowers participating in trial modifications was 637, 353.