Today, the Treasury Department announced the “Making Home Affordable” Program (Program). This Program implements the Homeowner Affordability and Stability Plan (Plan) unveiled by President Obama last month to “stem the spread of foreclosures and falling home values” in the United States. The Program includes the Home Affordable Modification Program Guidelines (the “Guidelines”) which are expected to become the standard industry practice for modifying mortgage loans to affordable and sustainable levels.
In a press release announcing the Program, Treasury Secretary Geithner stated: "It is imperative that we continue to move with speed to help make housing more affordable and help arrest the damaging spiral in our housing markets, just as we work to stabilize our financial system, create jobs and help businesses thrive. Economic recovery requires action on all three fronts.” Echoing Geithner’s sentiments, HUD Secretary Shaun Donovan commented: "This step forward represents a tremendous coordinated effort between major government and regulatory agencies to help bring relief to America's housing market and homeowners. This plan will help make home ownership more affordable for nine million American families and in doing so, help to stop the damaging impact that declining home prices have on all Americans." The Program also received support from the federal banking agencies.
This Program has two primary components: (1) the Home Affordable Refinance Program (Refinance Program) and (2) the Home Affordable Modification Program (Modification Program). A third component to the Program includes efforts to strengthen confidence in Fannie Mae and Freddie Mac in order to support the mortgage market and lower mortgage rates. Treasury, in conjunction with HUD and other members of an interagency task force, prepared Counselor Q&As and Borrower Q&As to facilitate Refinance Program and Modification Program understanding.
The Refinance Program will enable certain homeowners to take advantage of today’s lower interest rates and reduce monthly payments. Specifically, this Program will permit eligible homeowners whose mortgages are owned by Fannie Mae or Freddie Mac to refinance into 15 or 30 year fixed-rate mortgages at current interest rates. In order to be eligible, the homeowner must (i) be current on the mortgage (no more than 30 days late within the past 12 months), (ii) occupy the (1 to 4 unit) property as his or her primary residence, (iii) have a stable income sufficient to cover the new payment and (iv) have a current loan-to-value ratio between 80 and 105 percent. The Refinance Program ends in June 2010.
The Modification Program and accompanying Guidelines will assist eligible homeowners at risk of foreclosure by modifying their mortgage payments to more “affordable” and sustainable levels. In order to be eligible, the homeowner must (i) occupy the (1 to 4 unit) property as his or her primary residence, (ii) have an unpaid principal balance of $729,750 or less (higher for 2 to 4 units), (iii) have taken out the mortgage before January 1, 2009 (iv) have a current mortgage debt-to-income ratio greater than 31% and (v) have a mortgage payment that is no longer affordable.
As part of the Modification Program, Treasury will partner with financial institutions to reduce homeowners’ monthly mortgage payments by allowing lenders to reduce payments on mortgages to no greater then 38% DTI with Treasury matching reductions in monthly payments dollar-for-dollar match rate on modifications between 38% an 31%. Under the Modification Program, the government will also provide upfront and “pay for success” incentives to lenders, servicers and borrowers. A standard net present value (NPV) test will be applied to each loan that is in “imminent default” (60 days delinquent). It will also allow for standard waterfall adjustments by reducing interest rates to 2%, lengthening maturity to 40 years and principal forbearance. While the principal reduction will be in the servicer’s discretion, to ensure long term affordability, the new interest rate must remain in place for five years, but can be gradually stepped-up by 1% annually to the conforming loan rate in place at the time of the modification.
The Modification Program also includes certain features and additional efforts to generally support the loan modification process. First, while the Modification Program is voluntary, use of the program is required for all TARP participants. In addition, the Obama Administration intends to seek changes to the Hope for Homeowners and other FHA programs so that these programs may work in tandem with the Modification Program. Further, in order to provide additional modification incentives, the Obama Administration will continue to seek changes to the bankruptcy laws that will permit judicial modification where other modification efforts have failed.
The third component of the Program seeks to support the mortgage market and lower mortgage rates by enhancing the financial capacity of Fannie Mae and Freddie Mac and promote stability and liquidity, many of which have already been implemented. The Program expects to achieve these goals by (i) increasing its funding commitment to the GSEs, (ii) raising the ceiling on the GSEs’ retained mortgage loan portfolios by $50 billion to $900 billion with corresponding increases in allowable debt outstanding, (iii) continuing to purchase GSE-issued MBS; and (iv) supporting cooperative ventures with state agencies. These efforts will not use EESA or Financial Stability Plan funds.