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HAMP: What the loan-mod changes mean

The Home Affordable Modification Program is aimed at keeping struggling borrowers from losing their homes, but the number who've had their loans permanently modified is a tiny percentage of the total the federal government believes is eligible.

Yesterday the Obama administration announced changes to HAMP in hopes of turning things around.

The HUD press release is ... well, not exactly clear-cut about what those changes are. So here's the translation offered by the Consumer Federation of America:

· Requiring participating servicers under HAMP to offer at least 3 months’ forbearance of mortgage debt for unemployed borrowers, and encouraging such assistance for up to 6 months.

· Requiring participating servicers to use principal reduction as a primary means of reducing borrowers’ payments where loans are more than 115 percent of the current home value.

· Offering borrowers that are current on their mortgages but with debts greater than their home’s current value the opportunity to refinance into a lower cost, long-term fixed rate mortgage insured through the FHA if the current lender will agree to reduce principal owed by at least 10 percent and the total combined debt including any second liens would be no greater than 115 percent after the refinancing.

· Requiring HAMP servicers to work with borrowers in bankruptcy on mortgage modifications, and waive the trial period for such modifications if consumers have been successfully performing under bankruptcy settlements.

· Increasing the incentives to get second lien holders to reduce their claims to facilitate modifications.

· Clarifying that HAMP servicers must suspend all foreclosure actions and notices for borrowers that have sought modifications or are in trial modification periods, and requiring a written certification that a borrower is not HAMP eligible before an attorney or trustee can conduct a foreclosure sale.

Barry Zigas, director of housing policy for the consumer federation, thinks these changes will make a difference.

"Borrowers who are unemployed and those that find their homes are worth far less than the remaining debt on them are now those driving delinquency and default numbers," he said in a statement.

Some offered a thumbs down. Dean Baker, co-director of the Center for Economic and Policy Research, is particularly critical. (Baker, if you'll recall, is the economist so convinced we were in a bubble earlier in the decade that he sold his home in 2004 to rent instead.)

His criticism is aimed at the "substantial incentive" provided for companies holding first mortgages to reduce principal by having FHA "guarantee a new loan at 97.75 percent of the current market value."

"By substantially reducing the required payment on the first mortgage, the program will be creating a situation in which the second mortgage -- which would be worth little or nothing in foreclosure -- will suddenly again hold considerable value," he said in a statement. "This will be a huge windfall for second mortgage holders. It is worth noting that the major banks have vast portfolios of second mortgages."

This is great for those lenders, he says, and lousy for taxpayers (he says FHA will probably take a big hit from this plan). He doesn't even think it's great for the borrowers involved:

If the purpose of this modification program is to help homeowners, then any policy must ask two simple questions.

1) Is the homeowner paying less in ownership costs than they would to rent a comparable unit?

2) Is the homeowner likely to end up with equity in their home if they sell it in the next 3-5 years?

Both of these questions require an assessment of specific housing markets. If the market is still bubble-inflated, then the answers to these questions will be no and any money spent on modifications will be helping banks, not homeowners.

For some reason there is an enormous reluctance to ask these basic questions about the housing market. The failure to ask these questions in the years 2002-2006 provided the basis for the housing bubble.

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