Making Home Affordable

Last updated

The Making Home Affordable program of the United States Treasury was launched in 2009 as part of the Troubled Asset Relief Program. The main activity under MHA is the Home Affordable Modification Program. [1]

Contents

Other programs under MHA include: [2]

Background

The subprime mortgage crisis was triggered by a large decline in home prices after the collapse of a housing bubble, leading to mortgage delinquencies, foreclosures, and the devaluation of housing-related securities. Declines in residential investment preceded the recession and were followed by reductions in household spending and then business investment. Spending reductions were more significant in areas with a combination of high household debt and larger housing price declines. [3]

The housing bubble preceding the crisis was financed with mortgage-backed securities (MBSes) and collateralized debt obligations (CDOs), which initially offered higher interest rates (i.e. better returns) than government securities, along with attractive risk ratings from rating agencies. The crisis was caused by the rise in subprime lending and the increase in housing speculation. The percentage of lower-quality subprime mortgages originated during a given year rose from the historical 8% or lower range to approximately 20% from 2004 to 2006, with much higher ratios in some parts of the U.S. [4] [5] A high percentage of these subprime mortgages, over 90% in 2006 for example, were adjustable-rate mortgages. [6] Housing speculation also increased, with the share of mortgage originations to investors (i.e. those owning homes other than primary residences) rising significantly from around 20% in 2000 to around 35% in 2006–2007. These changes were part of a broader trend of lowered lending standards and higher-risk mortgage products, [6] [7] which contributed to U.S. households becoming increasingly indebted. The ratio of household debt to disposable personal income rose from 77% in 1990 to 127% by the end of 2007. [8]

When U.S. home prices declined steeply after peaking in mid-2006, it became more difficult for borrowers to refinance their loans. As adjustable-rate mortgages began to reset at higher interest rates (causing higher monthly payments), mortgage delinquencies soared. Securities backed with mortgages, including subprime mortgages, widely held by financial firms globally, lost most of their value. [4]

During the 2008 United States presidential election, Presidential candidate Barack Obama promised to help homeowners who were facing foreclosure during the crisis. [9]

HAMP

The Home Affordable Modification Program (HAMP) is a government program introduced in 2009 to respond to the subprime mortgage crisis. HAMP [10] is part of the Making Home Affordable program (MHA), [11] established in concert with the Hardest Hit Fund program (HHF) [12] under the Troubled Asset Relief Program (TARP), a part of the Emergency Economic Stabilization Act of 2008. [13] HHF provides targeted aid to home owners in states hit hardest by the economic crisis and works in tandem with HAMP and most MHA programs.

HAMP (and the entire MHA Program) is set to expire December 31, 2016, the last day to submit applications, and the Modification Effective Date must be on or before September 30, 2017. HHF has been extended to 2020.

Purpose

The Home Affordable Modification Program (HAMP) is designed to help financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term. This is done by interest rate reduction, fixing the interest rate, principal reduction or forbearance, and term extension. The program provides clear and consistent loan modification guidelines and includes incentives for borrowers, servicers and investors.

In earlier years, the property with the loan to be modified had to be your primary residence. In June 2012, HAMP was significantly revised to expand the scope of the program and clarify some troubling issues. A Tier 2 modification program was initiated permitting modifications for loans on properties not owner occupied and also allowing multiple loans on multiple properties to be modified. Pre-existing rules for owner occupied properties now come under the umbrella of Tier 1 modifications.

Rules

The MHA Handbook [14] is a consolidated reference guide outlining the requirements and guidelines for the Making Home Affordable (MHA) Program and particularly HAMP, its most popular component. A complex calculation called the net present value (NPV) test [15] is the foundation of the HAMP program. Tier 1 and Tier 2 have their own NPV test. The NPV test predicates modification on whether the investor will make more money by modifying the mortgage rather than foreclosing.

Eligibility requirements

HAMP abides by the following eligibility and verification criteria:

Sunset of the program

At the Greenlining Institute 22nd Annual Economic Summit on May 8, 2015, Mel Watt announced that the program would cease end of year 2016. The Director of the FHFA had this to say regarding the program:

"Although the number of new borrowers entering these two programs continues to decline, in part because many eligible borrowers have already taken advantage of them and in part because of recovering house prices, lenders and servicers are continuing to approve new HAMP modifications and HARP refinances. Extending HAMP and HARP through the end of 2016 will provide real relief for borrowers who continue to face challenges either paying their mortgage or refinancing their loan." [16]

Modifications of second loans

Once the first loan is modified under HAMP, if the second loan is eligible (and in most cases it is), it too is either modified or partially or fully extinguished. This program expired on December 31, 2016.

Criticism

In his book Bailout: How Washington Abandoned Main Street While Rescuing Wall Street, Neil Barofsky argues that Treasury Secretary Tim Geithner never had the intention to utilize the program as intended by Congress. Instead of providing relief for homeowners to avoid foreclosures, it was Geithner's plan that the bank should proceed with foreclosures. Geithner "estimates" that the banks "can handle ten million foreclosures, over time", and that HAMP "will help foam the runway for them" by "keeping the full flush of foreclosures from hitting the financial system all at the same time." [17] As such, "banks participating in the program have rejected four million borrowers’ requests for help, or 72 percent of their applications, since the process began". [18] Citimortgage and JPMorgan Chase were among the banks that refused the most HAMP claims. As such, the program only helped 887,001 people out of the over 4 Million people that were originally estimated to be able to benefit from the program. [9]

See also

Related Research Articles

<span class="mw-page-title-main">Foreclosure</span> Legal process where a lender recoups an unpaid loan by forcing the borrower to sell the collateral

Foreclosure is a legal process in which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments to the lender by forcing the sale of the asset used as the collateral for the loan.

<span class="mw-page-title-main">FHA insured loan</span> US Federal Housing Administration mortgage insurance

An FHA insured loan is a US Federal Housing Administration mortgage insurance backed mortgage loan that is provided by an FHA-approved lender. FHA mortgage insurance protects lenders against losses. They have historically allowed lower-income Americans to borrow money to purchase a home that they would not otherwise be able to afford. Because this type of loan is more geared towards new house owners than real estate investors, FHA loans are different from conventional loans in the sense that the house must be owner-occupant for at least a year. Since loans with lower down-payments usually involve more risk to the lender, the home-buyer must pay a two-part mortgage insurance that involves a one-time bulk payment and a monthly payment to compensate for the increased risk. Frequently, individuals "refinance" or replace their FHA loan to remove their monthly mortgage insurance premium. Removing mortgage insurance premium by paying down the loan has become more difficult with FHA loans as of 2013.

<span class="mw-page-title-main">Second mortgage</span>

Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage. Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage. Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage. With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit. Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.

<span class="mw-page-title-main">Mortgage loan</span> Loan secured using real estate

A mortgage loan or simply mortgage, in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. The loan is "secured" on the borrower's property through a process known as mortgage origination. This means that a legal mechanism is put into place which allows the lender to take possession and sell the secured property to pay off the loan in the event the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is derived from a Law French term used in Britain in the Middle Ages meaning "death pledge" and refers to the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure. A mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan)".

The United States subprime mortgage crisis was a multinational financial crisis that occurred between 2007 and 2010 that contributed to the 2007–2008 global financial crisis. The crisis led to a severe economic recession, with millions of people losing their jobs and many businesses going bankrupt. The U.S. government intervened with a series of measures to stabilize the financial system, including the Troubled Asset Relief Program (TARP) and the American Recovery and Reinvestment Act (ARRA).

The Hope Now Alliance is a cooperative effort between the US government, counselors, investors, and lenders to help homeowners who may not be able to pay their mortgages. Created in 2007 in response to the subprime mortgage crisis, the alliance claims to have helped over 1 million homeowners avoid foreclosure through January 2008. Critics of the alliance contend that the assistance provided does not go far enough, and that not enough homeowners are being helped.

Loss mitigation is used to describe a third party helping a homeowner, a division within a bank that mitigates the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner's lender. Loss mitigation works to negotiate mortgage terms for the homeowner that will prevent foreclosure. These new terms are typically obtained through loan modification, short sale negotiation, short refinance negotiation, deed in lieu of foreclosure, cash-for-keys negotiation, a partial claim loan, repayment plan, forbearance, or other loan work-out. All of the options serve the same purpose, to stabilize the risk of loss the lender (investor) is in danger of realizing.

This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.

Regulatory responses to the subprime crisis addresses various actions taken by governments around the world to address the effects of the subprime mortgage crisis.

Loan modification is the systematic alteration of mortgage loan agreements that help those having problems making the payments by reducing interest rates, monthly payments or principal balances. Lending institutions could make one or more of these changes to relieve financial pressure on borrowers to prevent the condition of foreclosure. Loan modifications have been practiced in the United States since the 1930s. During the Great Depression, loan modification programs took place at the state level in an effort to reduce levels of loan foreclosures.

The Homeowners Affordability and Stability Plan is a U.S. program announced on February 18, 2009, by U.S. President Barack Obama. According to the US Treasury Department, it is a $75 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. The plan is funded mostly by the Housing and Economic Recovery Act. It uses cost sharing and incentives to encourage lenders to reduce homeowner's monthly payments to 31 percent of their gross monthly income. Under the program, a lender would be responsible for reducing total monthly mortgage payments (PITI) to no more than 38 percent of the borrower's income, with the government sharing the cost to further reduce the payment to 31 percent. The plan also involves potentially forgiving or deferring a portion of the borrower's mortgage balance. Mortgage servicers will receive incentives to modify loans and to help the homeowner stay current, though participation by lenders is voluntary.

The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader financial crisis of 2007–08.

Mortgage modification is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower. In general, any loan can be modified, and the process is referred to as loan modification or debt rescheduling.

A loan modification company, also known as a mortgage modification company, is a business that helps homeowners modify the terms of their home loans or mortgages. When a mortgage is modified, the original terms of the home loan contract between a lender and a borrower are renegotiated and then altered, usually in the favor of the borrower.

<span class="mw-page-title-main">Ocwen</span>

Ocwen Financial Corporation is a provider of residential and commercial mortgage loan servicing, special servicing, and asset management services, which has been described as "debt collectors, collecting monthly principal and interest from homeowners". Ocwen was founded in 1988 by William Erbey and is headquartered in West Palm Beach, Florida, with additional offices in Mount Laurel, NJ, Rancho Cordova, California, and St. Croix, U.S. Virgin Islands. It also has support operations in the Philippines and India. Ocwen's Slogan is "Helping Homeowners Is What We Do."

<span class="mw-page-title-main">Causes of the Great Recession</span>

Many factors directly and indirectly serve as the causes of the Great Recession that started in 2008 with the US subprime mortgage crisis. The major causes of the initial subprime mortgage crisis and the following recession include lax lending standards contributing to the real-estate bubbles that have since burst; U.S. government housing policies; and limited regulation of non-depository financial institutions. Once the recession began, various responses were attempted with different degrees of success. These included fiscal policies of governments; monetary policies of central banks; measures designed to help indebted consumers refinance their mortgage debt; and inconsistent approaches used by nations to bail out troubled banking industries and private bondholders, assuming private debt burdens or socializing losses.

<span class="mw-page-title-main">Mortgage industry of the United States</span>

The mortgage industry of the United States is a major financial sector. The federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

The United States Treasury established the Hardest Hit Fund in February 2010, to provide targeted aid to states hit hardest by the subprime mortgage crisis which began in 2007. Each state housing agency gathered public input to implement programs designed to meet the distinct challenges struggling homeowners in their state were facing. HHF is part of the Troubled Asset Relief Program.

<span class="mw-page-title-main">2007–2008 financial crisis</span> Worldwide economic crisis

The 2007–2008 financial crisis, or Global Financial Crisis (GFC), was a severe worldwide economic crisis that occurred in the early 21st century. It was the most serious financial crisis since the Great Depression (1929). Predatory lending targeting low-income homebuyers, excessive risk-taking by global financial institutions, and the bursting of the United States housing bubble culminated in a "perfect storm".

The Home Affordable Refinance Program (HARP) is a federal program of the United States, set up by the Federal Housing Finance Agency in March 2009, to help underwater and near-underwater homeowners refinance their mortgages. Unlike the Home Affordable Modification Program (HAMP), which assists homeowners who are in danger of foreclosure, this program benefits homeowners whose mortgage payments are current, but who cannot refinance due to dropping home prices in the wake of the U.S. housing market correction.

References

  1. ↑ "Making Home Affordable / Program Purpose and Overview" . Retrieved 2016-09-19.
  2. ↑ Public domain text copied from Making Home Affordable / Additional Programs Under MHA
  3. ↑ Mian, Atif and, Sufi, Amir (2014). House of Debt. University of Chicago. ISBN   978-0-226-08194-6.
  4. 1 2 Michael Simkovic, Competition and Crisis in Mortgage Securitization
  5. ↑ "Harvard University-The State of the Nation's Housing-2008-" (PDF). p. 4, Figure 4. Retrieved 5 October 2017.
  6. 1 2 Zandi, Mark (2010). Financial Shock. FT Press. ISBN   978-0-13-701663-1.
  7. ↑ "Missteps to Mayhem" . Retrieved 5 October 2017.
  8. ↑ "The End of the Affair". The Economist. 2008-10-30. Retrieved 2009-02-27.
  9. 1 2 Hudson, Michael (2015). "17 Wall Street Takes Control and Blocks Debt Writedowns". Killing the host : how financial parasites and debt destroy the global economy. CounterPunch Books. ISBN   978-3-9814842-8-1. OCLC   920675065.
  10. ↑ "Home Affordable Modification Program: Overview".
  11. ↑ "Home". www.makinghomeaffordable.gov. Retrieved 2016-03-18.
  12. ↑ "State-By-State Information". www.treasury.gov. Retrieved 2016-03-17.
  13. ↑ Treasury, "Housing," Initiative, TARP, http://www.treasury.gov/initiatives/financial-stability/TARP-Programs/housing/pages/default.aspx; and Emergency Economic Stabilization Act, Public Law 110-343, 122 Stat. 3765, October 3, 2008, http://www.gpo.gov/fdsys/pkg/PLAW-110publ343/html/PLAW-110publ343.htm
  14. ↑ "MHA Handbook and Guidance".
  15. ↑ "HOME AFFORDABLE MODIFICATION PROGRAM BASE NET PRESENT VALUE (NPV)MODEL SPECIFICATIONS" (PDF). U.S. Treasury. Retrieved October 26, 2015.
  16. ↑ "Prepared Remarks of Melvin L. Watt Director FHFA at Greenlining Institute 22nd Annual Economic Summit | Federal Housing Finance Agency".
  17. ↑ Barofsky, Neil M. (2012). Bailout : an inside account of how Washington abandoned Main Street while rescuing Wall Street. New York: Free Press. ISBN   978-1-4516-8493-3. OCLC   793575355.
  18. ↑ "Banks reject 72% of applicants under HAMP program". The Real Deal Miami. 2015-08-09. Retrieved 2020-06-24.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.