Obama administration releases new principal reduction guidelines designed to help struggling homeowners with Federal Housing Administration (FHA) insured mortgages.
"Tens of thousands of FHA borrowers will now be able to modify their mortgages," said HUD secretary Shaun Donovan
On May 20, 2009, the president signed the â€œHelping Families Save Their Homes Act of 2009.â€� This new law provides the FHA with additional loss mitigation authority to assist FHA mortgagors under the Making Home Affordable Program (MHA).
When MHA was initially introduced to the public back in February 2009, MHA excluded FHA insured mortgages, with the understanding that the FHA would create its own standalone program.
Effective August 15th 2009, mortgage services are now allowed to modify FHA mortgages, under the Home Affordable Modification Plan (FHA-HAMP). This will provide homeowners in default a greater opportunity to reduce their mortgage payments to a sustainable level while following the fundamentals of MHA designed to help homeowners retain their homes and prevent the destructive impact of foreclosures on families and entire communities.
The new FHA-HAMP authority will allow use of a partial claim up to 30% of the unpaid principal balance as of the date of the default combined with a loan modification. Like the broader Obama program, the FHA seeks to reduce mortgage-related payments to 31% of monthly income. But it gets there in a different way, by focusing on changes in the principal amount rather than only evaluating the interest rate. The maximum partial claim (principal reduction for payment purposes) consists of the sum of (i) arrearages, (ii) legal fees and foreclosure related costs (iii) principal reduction. The arrearages included in the partial claim cannot exceed 12 months PITI. Combining each of the above the maximum partial claim amount is 30% of the outstanding principal balance as of the date of the default or modification.
Although rate reductions and extended mortgage terms are as outline in the modification agreement, and appear to be permanent, the principal reduction is only a deferment of debt and required to be paid back if at all possible when the subject property is either refinanced or sold. There doesnâ€™t appear to any stipulations on any required timelines and only suggests that if and when values increase and the option is initiated by the borrowers.
To be eligible, the front end debt to income ratio must be as close as possible, but not lower than, 31 percent. The front end ratio is defined as the total monthly mortgage payment (PITI) for the modified mortgage divided by the borrower(s) gross monthly income. The back end debt to income ratio must not exceed 55 percent and is defined as the total monthly mortgage payment plus all recurring monthly debt dived by the borrower(s) gross monthly income.
FHA-HAMP can be utilized only if the borrower does not qualify for current loss mitigation home retention options (priority order FHA Special Forbearance, Loan Modification and Partial Claim).
To confirm the borrower(s) is capable of making the new FHA-HAMP payment, the borrower(s) must successfully complete a trial payment plan. The trial payment plan shall be for a three period and the borrower must make each adjusted scheduled payment on time. If the borrower does not successfully complete the trial period, the borrower is no longer eligible for FHA-HAMP.
Disposition options (pre-foreclosure sales and deed-in lieu of foreclosure) are still available to the servicers/mortgagees immediately upon default, if the cause of default is incurable, i.e. the borrower has no realistic opportunity to replace the lost income or reduce expenses sufficiently to meet the mortgage obligation.
Under FHA-HAMP, the Mortgagees may receive an incentive fee up to $1,250. This total includes $500 for the partial claim and $750 for the loan modification.
It has been reported that an estimated 15% of all FHA insured loans are 30 days or more past due on at least one mortgage payment. Although most FHA modification guidelines stay intact, the new action allows for additional borrower(s) qualification opportunities to reduce monthly obligations while they proceed to build financial stability.