The Helping Families Save Their Homes Act of 2009, heralded as a solution to the foreclosure crisis, has been in effect now for four months, and as yet does not appear to have made a dent in the rate of residential foreclosures.
HAMP, and a companion program (HARP) applicable to loans held or securitized through Fannie Mae and Freddie Mac, have been touted by the Administration as having the potential to help up to nine million homeowners. On paper at least, both programs embody features providing real relief from abusive mortgage terms and unaffordable payments. As an alternative to bankruptcy or as part of a Chapter 13 plan, HAMP could provide the homeowner with protections roughly comparable to those under the Helping Families Save their Homes in Bankruptcy Act (which was defeated in Congress earlier this year) under some sets of circumstances, but not under others.
The HARP program is limited in scope. It releases Federal funds to refinance existing mortgages that are current in repayment and do not exceed the market value of the house. It is aimed at responsible homeowners who would have been able to take advantage of current lower interest rates if the fall in property values had not eroded their equity. Refinancing under HARP does not affect the principal amount of the mortgage.
Savings to the homeowner are modest. As long as interest rates remain low and the homeowners do not default, there is no significant cost to the taxpayer. However, when one eliminates those people whose homes are seriously under water, those whose incomes will not support the modified payments, and those who would not realize enough savings to make refinancing worthwhile, the pool of potential HARP applicants is much curtailed. In the first four months of the program’s operation roughly 200,000 HARP refinancings have taken place. Some of these are already in arrears.
HAMP has more potential benefits but is more problematical. Under this program, homeowners faced with foreclosure or unaffordable payments due to income reduction can modify a mortgage with their existing lender/servicer, provided the lender opts to participate. Key features of HAMP are a provision to put a portion of the principal into forbearance to reduce payments, a payment target of 31% Debt to Income ratio (DTI) regardless of balance, and direct government subsidies to both lenders and homeowners.
There is considerable overlap with the Hope for Homeowners Act, a foreclosure prevention tool that went into effect October 1, 2008, and has found few applicants (fewer than 100 as of January, 2009). HAMP applicants are required to consider the HOPE program, and it is not clear which program applies if a person is eligible for both.
For the lender, participation in HAMP is optional, but required as a condition of receiving future bailout funds. Once enrolled, a lender must consider all borrowers who request it. However, an enrolled lender is required to modify the mortgage only if allowed by the applicable pooling and servicing agreement, and only if the net present value (NPV) after modification exceeds the pre-modification NPV. This creates additional loopholes. In practice, there many people have applied for HAMP but so far very few have been approved.
A number of major lenders have enrolled in the HAMP program and are reviewing applications, but the rate of acceptance is low. Given the uncertainties about implementation, timing, and eligibility, a homeowner who has received a foreclosure notice would be well-advised to consider filing for Chapter 13 bankruptcy to stop the foreclosure, anticipating that it may well be possible to either incorporate or substitute HAMP (or an as-yet unimplemented change in the laws) during the course of the plan.
The cost to the government, and ultimately the taxpayer, is potentially large if many people qualify for subsidies. There are also concerns about how the program would operate if continuing high employment produces a rash of defaults on the modified mortgages, or if the economy enters an inflationary phase and home values start to rise again.
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