Saturday, March 27, 2010

HAMP Principal Write-downs and Other Improvements

Originals posted on Calculated Risk (here and here):

There are a number of changes to HAMP announced today. This includes help for unemployed homeowners and more outreach. David Streitfeld at the NY Times gives an overview: U.S. Plans Big Expansion in Effort to Aid Homeowners.

Here is a fact sheet from Treasury on these changes.

The key changes are principal reductions and larger payments to 2nd liens (including for HAFA short sales). For short sales, the 2nd lien payment has been doubled from 3% of the outstanding balance to 6% - although this is probably still below the typical recovery rate for 2nd liens.

From Treasury on short sales (and deed-in-lieu):

Increase payoffs to subordinate lien holders who agree to release borrowers from debt to facilitate greater use of foreclosure alternatives including short sales or deeds-in-lieu.
  • The new payoff schedule allows servicers to increase the maximum payoff to subordinate lien holders to 6 percent of the outstanding loan balance and doubles from $1,000 to $2,000 the incentive reimbursement that is available to investors for subordinate lien payoffs, subject to an overall cap of $6,000.
  • For 1st lien principal reduction, the incentive from the Federal Government (taxpayers) is to pay 15 cents on the dollar for reductions in the unpaid principal balance for LTVs (loan-to-values) between 115% and 140%. For LTVs above 140%, the payment is 10 cents on the dollar, and for reductions below 115%, the payment increases to 21 cents on the dollar.

    The Treasury has some examples here for the various changes.

    An example of principal reduction (optional):

    HAMP Principal Reduction Click on example for larger image in new window.

    So this is 133% LTV. So the taxpayers will pay 15 cents on the dollar to the lender to reduce the principal by $33,000. This is a payment of $4,950 (the lender takes a loss of $28,050). This still leave the borrower with a LTV of 115%.m



    To recap... there are four elements to the Making Home Affordable Program Enhancements:
    1. Temporary Assistance for Unemployed Homeowners While They Search for Re-Employment

    2. Requirement to Consider Alternative Principal Write-down Approach and Increased Principal Write-down Incentives

    3. Improvements to Reach More Borrowers with HAMP Modifications

    4. Helping Homeowners Move to More Affordable Housing
    The focus is on principal writedowns, but possibly the bigger impact will be from the fourth point - the HAFA program (short sales and deed-in-lieu).

    The temporary assistance is just that - temporary. Hopefully the homeowner will find a job otherwise most borrowers will be moved on to #4.
    4. Helping Homeowners Move to More Affordable Housing
  • Increase incentives to provide more homeowners with foreclosure alternatives
  • Increase payoffs to subordinate lien holders who agree to release borrowers from debt to facilitate greater use of foreclosure alternatives including short sales or deeds-in-lieu.
  • The new payoff schedule allows servicers to increase the maximum payoff to subordinate lien holders to 6 percent of the outstanding loan balance and doubles from $1,000 to $2,000 the incentive reimbursement that is available to investors for subordinate lien payoffs, subject to an overall cap of $6,000.
  • Increase servicer incentive payments from $1,000 to $1,500 to increase use of foreclosure alternatives and encourage additional outreach to homeowners unable to complete a modification.
  • Double relocation assistance payment for borrowers successfully completing foreclosure alternative to $3,000
  • Help homeowners who use a short sale or deed-in-lieu to transition more quickly to housing they can afford.
  • I think this change will impact the most borrowers (I think principal reduction will be a limited tool). Treasury is doubling the incentive for 2nd lien holders (may still not be enough), and increasing the incentive for servicers and borrowers.

    This is the HAFA program that is scheduled to start in early April. This will probably only apply to around 3 million of the 8 million homeowners who are delinquent on their mortgage (initial guess). And probably only about half of those 3 million will receive a modification or use a short sale.

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