Obama Modification Plan Rolls Out

[Update one clarifies some eligibility statements.] The $75 billion mortgage refinance and modification plan launched Wednesday by the Treasury Department is estimated to reach some 9 million homeowners, according to Treasury estimates. The Making Home Affordable program’s guidelines will offer servicer and borrower incentives and are designed in such a way as to allow for immediate modifications, the Treasury said. “It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive,” Treasury secretary Tim Geithner said in a media statement. “Economic recovery requires action on all three fronts.” According to guidelines released by the Treasury, the program is made up of two levels of aid — a refinance program effective for an estimated 4 to 5 million homeowners and a modification program estimated to reach between 3 and 4 million homeowners. The refinance program will increase access to refinance options through relaxed standards. The modification program will be effective only or mortgages originated on or before Jan. 1, 2009 on owner-occupied, single-family one- to four-unit properties that serve as a primary residence. Borrowers in bankruptcy are not automatically eliminated, and those facing foreclosure will see foreclosure action suspended during a trial period or while borrowers are considered for preventative options. The Treasury has agreed to partner with servicers and share the costs of payment deductions in order to foster participation in the program. The lender or servicer, after reducing mortgage payments to no greater than 38 percent of the borrower’s debt-to-income, will receive a Treasury match for further reductions in monthly payments on a dollar-for-dollar basis, down to a 31 percent debt-to-income ratio. Servicers will also receive up-front incentives of $1,000 for each modification initiated under the program’s guidelines, as well as a $1,000 payment each year for up to three years for each borrower that remains in the program. Lender/investors of mortgages that enter the program while the borrower is still current on payments — but at risk of falling behind — will receive a one-time incentive of $1,500, while servicers of such mortgages will receive $500. The incentives are designed to help ease the losses that would be incurred by both servicers and investors when mortgage terms are written down. Read the program guidelines. A call to 5-year ARMs? A close look at modification terms reveals an interest rate floor of 2 percent, and a modified interest rate that remains in place for 5 years, after which time it “will be gradually increased 1 percent per year [or less]…until it reaches the interest rate cap” which is either the original contractual rate or the Freddie Mac (FRE) survey rate for 30-year fixed-rate mortgages. The language present in the guidelines suggests these modifications — principle forbearances — are little more than 5-year adjustable-rate mortgages, the low rates of which will increase after the first five years. The Treasury’s answer to this might just be its initiative to support the GSEs with more funding in the hopes it will muscle down interest rates. The program also attempts to support low mortgage rates by increasing Treasury funding commitment to Fannie Mae (FNM) and Freddie from $100 billion each to $200 billion each. And if the GSE funding initiative doesn’t work, there’s always the incentive in place within the program that allows borrowers whose payments are reduced a minimum 6 percent to accrue up to $1,000 each year for five years — up to $5,000 — based on timely monthly payments. As long as the borrowers don’t fall behind, they’ll enjoy up to $5,000, which will be paid directly to the servicer, who will in turn apply it toward the principal loan balance. So if borrowers’ interest rates begins to inch upward after five years and they find themselves with a chunk of principal forbearance to pay back when it’s all said and done, at least they’ll have a $5,000 contribution toward repayment from Uncle Sam. The Making Home Affordable program’s guidelines and fact sheet also contain language supporting so-called “cramdown legislation,” which if enacted would allow bankruptcy judges to “reduce the outstanding principal balance of a primary residence home mortgage loan to current fair market value” as a last resort, provided the borrowers were ineligible for either Hope for Homeowners or the new modification and refinance programs. Such legislation has been hotly contested by mortgage industry participants that have suggested allowing so-called cramdowns to take place will likely lead to further significant write-downs in an already battered secondary mortgage market — leaving banks with even larger-than-expected holes on their balance sheets and further contributing to investor doubt in the U.S. banking system. Write to Diana Golobay at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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