The Obama administration, seeking to help more homeowners lower their interest rates and shed mortgage debt, will relax the rules on a federal loan-modification program and triple its incentives to banks.
The revised Home Affordable Modification Program, or HAMP, also would pay Fannie Mae and Freddie Mac to forgive debt on homes that have lost value. The government-owned companies, citing cost, don’t reduce principal, a policy that has limited HAMP’s reach because they own or guarantee nearly half of U.S. home loans.
Housing and Urban Development Secretary Shaun Donovan, Assistant Treasury Secretary Tim Massad, and White House National Economic Council Director Gene Sperling announced the program changes yesterday in a phone call with reporters.
“This will expand the reach of HAMP,” Massad said.
The HAMP program changes are separate from a new refinancing plan that President Barack Obama promised to deliver in his State of the Union speech on Jan. 24, Sperling said. That effort will be detailed in coming weeks.
Whether Fannie Mae and Freddie Mac accept the administration offer is up to Edward J. DeMarco, acting director of the Federal Housing Finance Agency, which is charged with minimizing losses to the companies and to taxpayers. In a written statement, DeMarco said he would analyze the potential costs and benefits of participating in HAMP’s principal writedown effort.
No Principal Forgiveness
FHFA recently released an analysis “concluding that principal forgiveness did not provide benefits that were greater than principal forbearance”, DeMarco said in a written statement.
In that analysis, released to Congress in recent days, DeMarco estimated that forgiving mortgage debt could cost the government-supported companies almost $100 billion. Fannie Mae and Freddie Mac, which have cost taxpayers more than $150 billion so far, guarantee nearly 3 million single-family homes that are underwater, meaning the owners owe more than the property is worth.
The HAMP expansion, called HAMP Tier 2, triples incentives paid to banks that reduce mortgage principal to a maximum of 63 cents for every dollar of debt forgiven.
Investors who rent out their properties would be eligible to refinance under the new rules. The deadline for applying for a HAMP loan modification is extended for a year, to the end of 2013.
HAMP has been the Obama administration’s signature rescue effort for delinquent homeowners struggling in the aftermath of a lending bubble that inflated property values.
About 900,000 borrowers have successfully used the lifeline to refinance, saving an average of about $500 a month -- fewer than the 4 million borrowers HAMP was expected to reach. The program pays mortgage servicers and investors for successfully modifying loans. Because of the low response, about two-thirds of the program’s $29.9 billion budget, which was funded through the Troubled Asset Relief Program, or TARP, hasn’t been obligated.
HAMP loan modifications are limited to mortgages worth $729,500 or less. The new rules are expected to be effective by May.
Fannie Mae and Freddie Mac have been under government control since 2008, when they were taken into conservatorship as they teetered on the brink of collapse. Since then, the two have relied on government aid to continue operating.
DeMarco, who is independent of the Obama administration, has resisted policies that could add to the bailout. The new HAMP rules, structured as sort of a fee for service, is one way to entice the government sponsored companies to participate in the administration’s foreclosure prevention efforts.
“This is a hoot,” said Thomas A. Lawler, an economist and former Fannie Mae executive. “The government will pay Fannie and Freddie, who are effectively owned by the government, to reduce the principal on certain loans?”