Last week Bank of America announced that it would reduce mortgage principal balances on a small subset of loans for customers in default. Two days later, the Obama administration announced updates to its Home Affordable Modification Program (HAMP), also an attempt to help underwater homeowners who may be contemplating a strategic mortgage default.
From the Home Affordable Modification Program press release, dated March 26, 2010: “The program modifications will expand flexibility for mortgage servicers and originators to assist more unemployed homeowners and to help more people who owe more on their mortgage than their home is worth because their local markets saw large declines in home values.”
HAMP is perhaps not the last-ditch effort, but another in a string of attempts to “offer a second chance to up to 3 to 4 million struggling homeowners through the end of 2012.” The new program aims to do more to help people who are unemployed, and those who owe significantly more than their homes are worth (which is a lot of Phoenix homeowners). Home Affordable Modification Program qualification guidelines are:
- Live in owner-occupied primary residence
- Have a mortgage balance less than $729,750
- Monthly mortgage payments greater than 31 percent of income
- Demonstrate financial hardship
Help for underwater Phoenix homeowners
Nationwide, more than 25% of homeowners are underwater (they owe more than their homes are worth). In the Phoenix real estate market, about 50% of homeowners owe more than their Phoenix homes are worth.
So far, HAMP has only permanently modified 170,000 loans, most often to lower the monthly payment by reducing the interest rate. Yet 52% of those modified loans went into default anyway. The latest plan, This one is sure to work! offers lenders 10 to 21 cents per loan dollar reduced to reduce qualified borrowers’ mortgage principals. Unemployed homeowners would qualify for temporary payment reductions until they could find a job.
Some commentators say that the latest plan to rescue the housing market is too feeble. For one, banks are not required to write down mortgage holders’ principal balances (and the Bank of America “pilot” program would apply to 3% of its borrowers in default, at the most). And, the program doesn’t apply to people who are underwater but still making their payments – some say that these are the folks most likely to up and walk away from their mortgages.
Other commentators say that something bold needs to be done, even if it’s not exactly right. “But this kind of debate in Washington is akin to ‘Nero fiddling while Rome burns.’ While we attempt these ineffectual programs, we are destroying the concept of home ownership as the centerpiece of the American economy and the American dream.”
What do you think?
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