Home Affordable Modification Program

The Home Affordable Modification Program, also known as HAMP, is a federal program of the United States, set up to help eligible home owners with loan modifications on their home mortgage debt. It is being set up in the context of the ongoing subprime mortgage crisis in the debt markets, continuing from 2008.

The target of the program is 7 to 8 million struggling homeowners at risk of foreclosure by working with their lenders to lower monthly mortgage payments. The Program is part of the Making Home Affordable Program which was created by the Financial Stability Act of 2009. The program was built as collaboration with lenders, investors, securities, mortgage servicers, the FHA, the VA, FHLMC, FNMA, and the Federal Housing Finance Agency, to create standard loan modification guidelines for lenders to take into consideration when evaluating a borrower for a potential loan modification.

Purpose
HAMP is authorized by sections 101 and 109 of the Emergency Economic Stabilization Act of 2008, which has been amended by 7002 of the American Recovery and Reinvestment Act of 2009 (collectively “The Acts”). Congress has several enumerated purposes under the Acts. The main purpose is to provide the U.S. Treasury Department with the authority and mechanisms necessary to restore stability to the United State’s financial system—which includes—(1) protecting home values, college funds, retirement accounts, and life savings, (2) preserving homeownership, (3) promoting jobs and economic growth, and (4) protecting the interests of taxpayers.

As a result of the authority it received under the Acts, the U.S. Treasury Department developed HAMP. Under HAMP, mortgage servicers (those who are commonly referred to as the mortgage lenders) are provided with the opportunity to enter into contracts with the Federal Government (the U.S. Treasury) to modify homeowners’ mortgage loans in a particular and uniform fashion and receive incentive payments in return.

In an attempt to require mortgage servicers to modify mortgages in a particular and uniform fashion, the U.S. Treasury has taken several actions. First, the U.S. Treasury Department not only describes HAMP and its related programs on its own publicly-accessed website (www.hmpadmin.com), but it also provides a step by step guide on how mortgage servicers are supposed to be performing the HAMP modifications. For example, in the HAMP Handbook for Servicers of Non-GSE Mortgages, the U.S. Treasury requires these servicers to actively solicit borrowers to participate in HAMP before referring a loan to foreclosure or conducting a scheduled foreclosure sale.

Second, the U.S. Treasury require servicers to use a particular net present value calculation developed specifically for HAMP (“ HAMP NPV”). The HAMP NPV was developed specifically for HAMP by a group of experts taken from the U.S. Treasury, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac. The HAMP NPV attempts to predict whether the lender/investor will make more money by modifying the mortgage or foreclosing. Under HAMP, if the lender will make more money entering into a HAMP modification with the borrower (resulting in a positive HAMP NPV)--and assuming the mortgage loan is otherwise eligible under HAMP (which is discussed below)--the lender must offer a HAMP modification and cease all current efforts to foreclose. However, if the lender will lose more money entering into a HAMP modification with the borrower (resulting in a negative HAMP NPV), the lender may proceed with foreclosure.

Thus, under HAMP, lenders and/or mortgage servicers are required to make a conscious and calculated determination as to whether the pursuit of a foreclosure will be financially beneficial for the lender/investor before the foreclosure is actively pursued--which presumptively should result in fewer foreclosures--thereby providing more stability to the U.S. economy and achieving the purpose intended by the United States Congress.

Eligibility requirements of program
The program abides by the following eligibility and verification criteria:
 * Loans originated on or before January 1, 2009
 * First-lien loans on owner-occupied properties with unpaid principal balance up to $729,750
 * Higher limits allowed for owner-occupied properties with 2-4 units
 * The current principal, interest, property taxes and homeowner's insurance payments are costing the borrower(s) over 31% of their gross monthly household income.
 * All borrowers must fully document income, including signed IRS 4506-T, proof of income (i.e. paystubs or tax returns), and must sign an affidavit of financial hardship
 * Property owner occupancy status will be verified through borrower credit report and other documentation; no investor-owned, vacant, or condemned properties
 * Incentives to lenders and servicers to modify at-risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default
 * Must not be more than 5% underwater - Example: 200k must be worth at least 190k.
 * Modifications can start from now until December 31, 2012; loans can be modified only once under the program

Loan modification terms and procedures

 * Participating servicers are required to service all eligible loans under the rules of the program unless explicitly prohibited by contract; servicers are required to use reasonable efforts to obtain waivers of limits on participation.
 * Participating loan servicers will be required to use a net present value (NPV) test on each loan that is at risk of imminent default or at least 60 days delinquent. The NPV test will compare the net present value of cash flows with modification and without modification. If the test is positive: meaning that the net present value of expected cash flow is greater in the modification scenario: the servicer must modify absent fraud or a contract prohibition.
 * Parameters of the NPV test are spelled out in the guidelines, including acceptable discount rates, property valuation methodologies, home price appreciation assumptions, foreclosure costs and timelines, and borrower cure and redefault rate assumptions.
 * Servicers will follow a specified sequence of steps in order to reduce the monthly payment to no more than 31% of gross monthly income (DTI).
 * The modification sequence requires first reducing the interest rate (subject to a rate floor of 2%), then if necessary extending the term or amortization of the loan up to a maximum of 40 years, and then if necessary forbearing principal. Principal forgiveness or a Hope for Homeowners refinancing are acceptable alternatives.
 * The monthly payment includes principal, interest, taxes, insurance, flood insurance, homeowner’s association and/or condominium fees. Monthly income includes wages, salary, overtime, fees, commissions, tips, social security, pensions, and all other income.
 * Servicers must enter into the program agreements with Treasury's financial agent on or before December 31, 2009.

Payments to servicers, lenders, and responsible borrowers

 * The Program will share with the lender/investor the cost of reductions in monthly payments from 38% DTI to 31% DTI.
 * Servicers that modify loans according to the guidelines will receive an up-front fee of $1,000 for each modification, plus “pay for success” fees on still-performing loans of $1,000 per year.
 * Homeowners who make their payments on time are eligible for up to $1,000 of principal reduction payments each year for up to five years.
 * The program will provide one-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers for modifications made while a borrower is still current on mortgage payments.
 * The program will include incentives for extinguishing second liens on loans modified under this program.
 * No payments will be made under the program to the lender/investor, servicer, or borrower unless and until the servicer has first entered into the program agreements with Treasury’s financial agent.
 * Similar incentives will be paid for Hope for Homeowner refinances.

Transparency and accountability

 * Measures to prevent and detect fraud, such as documentation and audit requirements, will be central to the program.
 * Servicers will be required to collect, maintain and transmit records for verification and compliance review, including borrower eligibility, underwriting, incentive payments, property verification, and other documentation.
 * Freddie Mac is appointed the compliance officer of the program.

Proliferation of scams from companies claiming to offer loan modifications
Throughout 2009 and 2010, foreclosure rescue and mortgage modification scams have been a growing concern. Charging fees before a loan modification is attempted is illegal and considered predatory. Predators are more likely to do business in states with higher numbers of foreclosure or properties at risk for foreclosure such as Illinois and Rhode Island, and in cities such as Phoenix. The Chicago Mortgage Fraud Task Force found eleven companies guilty of committed this type of fraud in the Brighton Park neighborhood of Chicago. Rhode Island launched a Loan Modification Scam Alert to raise awareness and provide a way for victims to report fraud. At a national level, Neighborworks, a government funded non-profit that works to make housing affordable, launched its own Loan Modification Scam Alert.

The website www.loanscamalert.org launched by Neighborworks lists signs of possible fraud:
 * A company asks for a fee in advance
 * Guarantees they can stop a foreclosure
 * Advises you to stop paying your mortgage company and pay them instead
 * Pressures you to sign paperwork
 * Claims to offer a government approved loan
 * Someone you don't know asks for personal financial information

Lender participants
A complete and updated list of lenders currently signed on is available at the Making Home Affordable website List of HAMP Lenders.

Controversy
Many have argued that HAMP has been grossly ineffective. According to the National Taxpayer Union: "HAMP has proven a colossal failure that has done more to harm than help debt-laden homeowners. Having only achieved slightly more than 500,000 permanent modifications, 40% of which the Treasury expects to default, HAMP has fallen dramatically short of its goal of helping 3 to 4 million homeowners avoid foreclosure. To date, far more borrowers have dropped out of the program than successfully achieved permanent loan modification. These borrowers, along with those who later default, will often be left with larger outstanding debt, worse credit scores, and less home equity. Congress should pass legislation that eliminates the HAMP program, to put an end to these counterproductive outcomes while saving taxpayers billions of dollars." However, the United States Government Accountability Office (“GAO”) conducted it own investigation and reported its findings in its report titled: Mortgage Foreclosures:  Documentation Problems Reveal Need for Ongoing Regulatory Oversight. According to the GAO, not only have banking regulators issued enforcement orders to various mortgage servicers for various mortgage servicing deficiencies, but the Federal Housing Finance Agency, Fannie Mae, Freddie Mac, and the U.S. Treasury have all issued letters to their respective servicers reminding them of their obligations to properly perform and document all of their required mortgage servicing activities. Moreover, according to the GAO: "Further, the regulators’ reviews also revealed that most servicers did not maintain sufficient staffing levels to process the increasing volume of foreclosures, nor were staff adequately trained to perform this work in compliance with relevant laws and regulations. For example, regulators found that one servicer that had previously understaffed this function and had not provided adequate training increased its document-signing staff from 5 to 80 and revised its training to include guidance for judicial foreclosures to address deficiencies in foreclosure processing."

Thus, while there are those who argue that HAMP is ineffective, it appears as if Federal governmental agencies are, at the very least, indirectly suggesting that the mortgage servicers may be to blame. As a result, it appears as if at least one government-sponsored enterprise has taken action that comports with the recommendations of the GAO. For example, Fannie Mae has mandated that all of its servicers must not only take potential foreclosures to mediation before attempting to foreclose--but these same mortgage servicers must (1) submit written pre-foreclosure offers to the homeowners before leaving the mediation and (2) maintain documentation that it submitted such written pre-foreclosure offers to the homeowners at the mediation.