Making Home Affordable

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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

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

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

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

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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 the global financial crisis (GFC), was the most severe worldwide economic crisis since the Great Depression. Predatory lending in the form of subprime mortgages targeting low-income homebuyers, excessive risk-taking by global financial institutions, a continuous buildup of toxic assets within banks, and the bursting of the United States housing bubble culminated in a "perfect storm", which led to the Great Recession.

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.{{cite book}}: CS1 maint: multiple names: authors list (link)
  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. p. 157. 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.
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