Q: I believe there was a material error in your recent article concerning President Obama’s Making Home Affordable Program.
First, eligibility for a HAMP loan does not depend on the loan being owned or serviced by Fannie Mae or Freddie Mac. For loans that are so owned there are some separate additional programs under HAMP such as the ability to refinance underwater loans.
Moreover, Fannie and Freddie are agents for Treasury to help Treasury administer the HAMP Program. But HAMP in large measure initially was designed to address non-conforming conventional loans, such as subprime loans. Second, the eligible loan amount is $729,750, not $417,000 as you wrote.
A: Thank you for writing. The column in question did contain those errors (thanks for setting the record straight). But there’s more to the story, so let’s start at the top.
President Obama’s Making Home Affordable Program generally permits certain borrowers to work with their lenders to either obtain a loan modification or to refinance their loan. Effectively, there are two programs, which can make it confusing for homeowners.
Making Home Affordable Loan Modification
Of the 4 million homeowners that President Obama predicted would be eligible to have their mortgages modified, about one million homeowners have received temporary loan modifications, but just 116,000 (as of January, 2010) have received permanent modifications.
If a borrower decides to go down the loan modification path, the borrower has to meet certain financial criteria, including whether the home is the borrower’s primary residence; whether the first mortgage on the home is equal to or less than $729,750; whether the homeowner is having trouble paying the mortgage; whether the current mortgage was obtained before January 1, 2009; and, whether the amount you pay on your first mortgage, including, principal, interest, taxes insurance and homeowner’s association dues, is more than 31 percent of your current gross income.
If you fit into basic criteria, you can apply for Making Home Affordable Modification. You may not receive help from the lender, but you are at least eligible to apply.
The Making Home Affordable Modification program is geared to helping homeowners who have fallen on hard times. Their properties may have decreased in value, and they may have suffered other hardships and need their lender’s consideration in reducing their loan’s monthly payments.
Under the Making Home Affordable Modification program, the lender has several tools it can use to reduce a homeowner’s payments, including reducing the loan’s interest rate on a temporary basis down to 2 percent; increasing the term of the loan; or, lowering the principal balance due on the loan.
According to HAMP guidelines, lenders can lower the interest rate on mortgages for up to five years. After five years, the interest rates on the loans that received a permanent loan modification will rise to a rate that is generally set around the time of the permanent loan modification.
In other words, if a borrower had a loan with an 8 percent interest rate, that borrower may end up with an interest rate of 2 to 5 percent for the first five years. And with interest rates as low as they are today, that same borrower’s interest rate for the balance of the term of the loan would be set based on today’s rates of between 5 to 6 percent.
Generally, if you apply for a loan modification under the Obama plan, you will have to complete a trial loan modification for three or more months. If you pass the test of making your payments on time in the trial modification and the bank decides that you qualify for a permanent loan modification, you will then receive documentation giving you a “permanent” loan modification. And, at the time the permanent loan modification is given to you, the interest rate is set.
Borrowers in financial trouble will tend to migrate towards the Making Home Affordable Modification program and borrowers who are not in financial trouble, but have seen their property’s value go down, will attempt to refinance their loan under the Home Affordable Refinance program.
Making Home Affordable Refinance
If you decide to apply for a Making Home Affordable Refinance under President Obama’s Making Home Affordable Program, you will need to own a one-to-four unit home; the home’s loan must be owned or guaranteed by Fannie Mae or Freddie Mac; you must be current on your mortgage payments and the amount you owe on your loan must not exceed about 125 percent of the current market value for the home.
To determine whether your loan is owned or guaranteed by Fannie Mae or Freddie Mac, these companies have set up web pages that allow you to look up your loan by address.
To find out whether your loan is owned or guaranteed by Fannie Mae, go to www.fanniemae.com/loanlookup. To look up your loan on Freddie Mac’s site, the address is www.freddiemac.com/mymortgage. Each site will ask you to confirm that you are the owner of the property in question and may even ask for some personal information to confirm your ownership of the property.
For borrowers who want to refinance, the Making Home Affordable Refinance program offers some district advantages.
Borrowers with less than 20 percent in equity in their properties can still refinance under the Making Home Affordable Refinance program and take advantage of today’s historic low interest rates.
While lenders say they have modified or refinanced hundreds of thousands of loans outside of the Making Home Affordable Program, it’s clear that these programs are troubled. The rate of redefault (for loans that have already been modified) is extremely high, and overall, the rate of mortgage default is rising.
Next week I’ll look at some reasons why President Obama’s Making Home Affordable Modification and Refinance programs are failing.
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