Government boosts mortgage help
Last week, I told you about two recently announced enhancements to the federal government’s programs intended to stem the tide of residential foreclosures.
The first of these is aimed at borrowers who can’t make their payments because they are out of work. This enhancement allows for up to six months of substantially reduced payments while a borrower looks for new employment. The second enhancement is intended to help borrowers who are underwater — meaning their home is worth less than what they owe against it. Here, forgiveness of a portion of the principal balance of a loan will be added to lower interest rates and extended maturity dates as a way to get a borrower’s payments down to 31 percent of income and, at the same time, eliminate the underwater situation, which creates an incentive to walk away from the property.
Other enhancements announced March 26 by the Department of the Treasury include:
• New FHA-insured loans for underwater borrowers.
In this program, an underwater but not-yet-delinquent borrower with a loan not insured by the Federal Housing Administration can take out a new loan that is insured by the FHA.
The new loan will have a principal balance equal to 97.5 percent of the current value of the property, thereby giving the borrower some equity. To make this work, the previous lender must accept the proceeds from the new loan as a full payoff and forgive the rest of the debt. The government will throw money at the previous lender to encourage its participation in the transaction. The government will likely also help the cause by purchasing mortgage-backed securities that include these new loans. (The government has already purchased $1.4 trillion of mortgage-backed securities that haven’t exactly been a source of excitement among other investors.)
• Additional enhancements to HAMP (Home Affordable Modification Program).
What we have here is a mishmash of rule changes intended to make HAMP more effective. These include requirements that lenders and loan servicers actually take the initiative to contact borrowers to discuss loan-modification opportunities. There are also limitations on starting a foreclosure until a borrower has been evaluated for a loan modification. And loan modifications will now be available to borrowers with FHA-insured loans who previously were not eligible for HAMP.
• Incentives for short sales and deeds in lieu of foreclosure.
To further encourage borrowers who can’t — or don’t want to — go down the loan-modification/new-loan path to initiate a short sale (sell the property for less than the debt against it) or agree to a deed in lieu of foreclosure (give the property to the lender in satisfaction of the debt), the government is upping its housing relocation allowance from $1,500 to $3,000.
These new strategies will consume some $50 billion of TARP (Troubled Asset Relief Program) funds and are, of course, controversial as yet another example of a “bailout” — rewarding people for bad decisions and greed. On the other hand, these programs are meant to, and hopefully will, help people whose mortgage-loan problems are not of their own making.
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Jim Flynn is a private attorney at Flynn Wright
& Fredman LLC in Colorado Springs.
The firm primarily represents clients in the real estate, financial services and small-business sectors.
Reach him at jtflynn@fwflegal.com.
