On February 18, 2009, the Obama Administration unveiled the Homeowner Affordability and Stability Plan ("HASP"). The plan is comprised of three components: (1) access to low-cost refinancing for "responsible" homeowners without rewarding homeowners who purchased homes beyond their means; (2) support for low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac; and (3) creation of a Homeowner Stability Initiative ("HSI") in the amount of $75 billion to assist at-risk homeowners. The plan is scheduled to go into effect on March 4, 2009.

Low-Cost Refinancing

One component of HASP is targeted towards a large group of homeowners who are not in immediate distress and have been making their mortgage payments on-time, but are paying above-market interest rates and lack sufficient equity in their homes to refinance or sell the subject property. It will apply to homeowners with traditional loans either owned or guaranteed by Fannie Mae or Freddie Mac. Eligible homeowners will be able to refinance at the current rates - around five percent (5%) - without making a twenty percent (20%) down-payment.

Funding Fannie Mae And Freddie Mac

HASP is also designed to provide $200 billion in additional funding to Fannie Mae and Freddie Mac, the two government-controlled finance companies. The plan provides for Fannie Mae and Freddie Mac to use the additional funds to increase their purchases of mortgages and mortgage-backed securities. The Treasury Department will use its authority under the Housing and Economic Recovery Act passed under the Bush Administration to increase its pledge from $100 billion each to $200 billion each to Fannie Mae and Freddie Mac to keep them solvent.

Homeowner Stability Initiative

The most significant component of HASP for mortgage lenders is the HSI. The HSI is targeted towards the four to five million homeowners who are struggling to meet their mortgage payments and are in danger of foreclosure. The HSI will apply $75 billion towards helping homeowners stay in their homes and commit to making mortgage payments. It is not designed to assist owners of investment properties.

How The HSI Will Work

The purpose of the HSI is to provide incentives and subsidies to lenders in order for the lenders to modify existing loans and establish more affordable loan terms for struggling homeowners. The loan modifications would reduce the monthly payment amounts owed by homeowners to levels that the homeowners can sustain. Such loan modifications will require a multi-step process. First, lenders will be required to reduce interest rates and loan balances to an amount which will result in a debt-to-income ratio of thirty eight percent (38%). Once that level is reached, the federal government will match subsequent reductions made by lenders to arrive at a debt-to-income ratio of thirty one percent (31%). After five (5) years, lenders will be able to gradually increase the rates to conforming rates at that time.

The incentives to servicers of loans will be a $1,000 up-front payment that they will receive for each qualified loan modification that is completed and $1,000 each year for up to three (3) years as long as the modified mortgage remains current. If the servicer completes the modification before the loan becomes delinquent, the plan calls for a $500 incentive to the servicer and a $1,500 incentive to the mortgage holder. Additionally, borrowers will receive a reduction to their principal balance of $1,000 for each year they stay current, up to a maximum of five (5) years.

How The HSI Will Affect The Ability To Foreclose

Lenders will still have the final decision on whether to make concessions to particular borrowers. However, to discourage foreclosure and to further subsidize lenders for losses sustained on modified loans if home prices further decline, the United States Treasury is working with the Federal Deposit Insurance Company to create a fund of $10 billion.

The Treasury intends to create uniform modification guidelines to prevent foreclosures. Implementation of the guidelines will be mandatory at government agencies, government-sponsored enterprises, and all financial institutions that receive federal assistance going forward.

The Treasury also hopes to reduce the number of foreclosures by allowing courts to modify mortgages of bankrupt borrowers who have no other options, and by increasing the flexibility of the Hope for Homeowners program.[1]

What This Means For Lenders

For lenders, the most significant provisions of HASP will relate to the HSI provisions and the underlying requirements for loan modifications for qualified homeowners. Obviously, to modify loans, lenders will need to understand the components of the government's plan and will need to have staff on hand to assist in the preparation of the necessary documentation. Whether or not this new plan will actually be effective in reaching the stated goal - preventing more loans from going into default - will have to await the passage of time. If the loan modifications are not effective in assisting borrowers to keep their loans current, it is likely that the subject loans will again go into default, resulting in a further increase in the number of foreclosure actions.