US Treasury Forcing Mortgage Principal Forgiveness

Peter Gridley | Photographer's Choice | Getty Images

Late Friday the U.S. Treasury Department announced a major expansion of its Home Affordable Modification Program (HAMP).

The three-year-old program has been largely deemed unsuccessful, as it has provided just about 750,000 borrowers with permanent loan modifications. The initial expectation from government officials was that it would help three to four million borrowers.

“Clearly the initial program erred on the side of making sure taxpayers were protected, but it didn’t do enough to help the overall economy,” said Michael Barr, former Asst. Treasury Secretary for Financial Institutions and one of HAMP’s original architects.

Now taxpayers will pony up the cash, as Treasury is tripling the financial incentives to lenders and opening the program up to Fannie Mae, Freddie Mac and investors in rental properties. The money would come out of TARP funds, i.e. from the taxpayers. We still don’t know if Fannie and Freddie will participate, since their conservator, the FHFA’s Ed DeMarco, has been actively fighting principal write down for years. A week ago he sent a letter to members of congress explaining the math behind his argument. 

But the Treasury may be forcing DeMarco’s hand. He claimed that writing down mortgage principal would cost $4 billion more than the modifications that Fannie and Freddie are doing now. Those involve interest rate reduction and principal forbearance. The newly expanded HAMP, however, with its triple- sized cash incentives, would shore up that $4 billion hole. Funny how he mentioned that hole on Monday, and the Treasury announced the new plan Friday.

“If he [DeMarco] doesn’t get to yes, then he has no political leg to stand on,” says FBR’s Ed Mills, who estimates the enhanced program could add one million borrowers to its ranks. Mills says a ‘no’ from DeMarco would enable the Obama Administration to replace him, which it tried to do once before, only to be blocked by members of Congress.

“It would be an appropriate response for him to do it,” says Barr of DeMarco. “I do think they should participate.”

I asked Barr why the Treasury waited three years to use the TARP funds for principal reduction. The obvious answer is that this is presidential election year, and the housing market is still floundering, but Barr claims the Treasury was just being careful.

“It’s a use of taxpayer funds, and you want to make sure you’re not providing more of an incentive than is required,” he said. “One person’s successful program is another person’s bailout.”

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Treasury Drops Short Sale Requirements

Paul J. Richards | AFP | Getty Images

As more and more homeowners dipped underwater on their mortgages last year and didn't qualify for loan modifications, the Obama Administration launched a program to help them out.

The Home Affordable Foreclosure Alternative program, a last resort, includes incentives to lenders to do more short sales.

That's when the lender allows the home to be sold for less than the value of the loan; the lender takes a financial loss, but avoids a far more costly foreclosure. Borrowers also get cash incentives to leave.

There are close to 11 million underwater borrower, with that number rising has home prices dip again.

The program wasn't doing so well by the end of the year and had come under quite the criticism from the industry for being too complicated and too strict.

Here's how the Treasury explains it:

"While HAFA has been widely credited with streamlining the short sale process by setting clear timelines, documentation requirements and procedures, feedback from various stakeholders including servicers, housing counselors, realtors and others supported that additional enhancements could be made to further streamline short sale transactions, to the benefit of homeowners."

A recent report from the folks who oversee the TARP (the Congressional Oversight Panel) said that the Treasury has spent just $4.3 million on HAFA for 661 short sales. So Treasury, last week, decided to change the rules a bit:

HAFA no longer requires that servicers verify the borrowers finances HAFA no longer requires servicers to determine if the borrowers monthly payment is higher than a 31 percent debt-to-income ratio. HAFA no longer requires second-lien holders to agree to accept 6 percent of the unpaid principal balance owed them, up to $6,000. Servicers now decide who gets paid how much, with a cap still at $6000. HAFA now requires borrowers seeking a short sale get an answer/agreement within 30 days. The last one is a no-brainer, as delays have scuttled far too many deals that could have benefited both borrowers and lenders.

I'm less thrilled with the verification of borrowers' finances and DTI ratio. If you don't have to verify anything about the borrower, other than a so-called, "hardship affidavit," then that opens the program up to all kinds of scams by borrowers who don't need to sell their home but just want to get out from under a bad investment. They may be delinquent on their loans by choice, not by necessity.

I'm sure the folks who had no problem lying on their mortgage applications would also have no problem fabricating some kind of "hardship."

As for the second lien issue, that's just a big bad can o' worms that needs far stricter guidance, not more lenient guidance.

Second lien-holders, many of whom are the major banks/servicers themselves, have been the fundamental roadblock to short sales so far.

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