Feds try for greater foreclosure prevention

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The Obama administration unveiled tweaks to its foreclosure-prevention effort Friday in hopes of helping “underwater” and unemployed homeowners stay in their homes.

As part of the new guidelines, loan servicers will receive financial incentives to write down the mortgages of eligible homeowners who are underwater — meaning they owe more than the home is worth.

Qualifying homeowners would see their mortgage balances trimmed to a level more in line with today’s falling property values. The remaining mortgage debt then would be refinanced into a Federal Housing Administration loan.

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The new guidelines also offer help to jobless workers, requiring servicers to offer temporary mortgage payment reductions to eligible unemployed homeowners while they search for new jobs.

The goal is to help 3 million to 4 million homeowners between now and the end of 2012, according to a U.S. Treasury Department press release.

“These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own,” the release says.

The government says “it will take time” to implement the new measures. Changes should begin within a few weeks, with the full scope of adjustments scheduled to be in place by the fall.

How it works

Underwater homeowners who qualify for a mortgage reduction may receive a mortgage principal writedown in conjunction with a loan modification through the federal Home Affordable Modification Program, commonly known as HAMP.

Alternatively, servicers may forbear as much as necessary of the principal balance over 115 percent of the property’s current value to bring the monthly payment down to 31 percent of income. Servicers then will forgive the forborne amount in three equal amounts over three years, so long as the borrower remains current on payments.

Under the new guidelines, servicers are not required to offer mortgage reductions. However, the federal government will offer financial incentives to servicers who do participate.

“We are providing increased financial incentives and expect that where principal write-down yields a greater economic benefit … lenders will generally choose to pursue the principal write-down option when they are legally permitted to do so,” says a document at the federal government’s Making Home Affordable Web site.

The new guidelines also offer help for eligible unemployed homeowners, who would be allowed to reduce their mortgage payments to no more than 31 percent of monthly income for a minimum of three months and for as long as six months.

After this period, borrowers will be evaluated for a HAMP modification if their mortgage payment is greater than 31 percent of monthly income and they meet other income and property eligibility requirements. Those who do not qualify must be considered for an alternative to foreclosure, such as a short sale.

The federal government will share the cost of the expanded program with the private sector. No new federal money will be used to fund the program changes — instead, the $50 billion federal share of the money will come from funds already allocated to the Troubled Asset Relief Program.

Who qualifies?

It remains unclear precisely who qualifies for mortgage principal forgiveness.

Homeowners whose property is worth at least 15 percent less than the amount of their first mortgage may be eligible for a reduction, “but not every underwater borrower will benefit from principal reduction through the HAMP program,” according to the document at the Making Home Affordable Web site.

Mortgage servicers and investors will contact homeowners who are eligible, according to the document.

More than 11.3 million U.S. residential properties — nearly one in four — with mortgages are now underwater, according to a recent study by First American CoreLogic.

Some homeowners definitely will be excluded from the program, according to the Treasury Department statement.

“For example, investors and speculators should not be protected under our efforts, nor should Americans living in million dollar homes or defaulters on vacation homes,” the statement says. “Some people simply will not be able to afford to stay in their homes because they bought more than they could afford.”

Unemployed homeowners who qualify for temporary payment reduction must live in their homes and have mortgages that meet other HAMP guidelines, such as a loan balance below $729,000.

They also must submit evidence that they are receiving unemployment assistance and must request temporary assistance in the first 90 days of delinquency.

Heavy fire

The new guidelines arrive as the administration is taking heavy fire for the failure of earlier loan modification efforts.

As of the end of February, permanent loan modifications had been granted to just 170,000 homeowners nationwide, according to the Treasury Department. Meanwhile, more than half of modifications have fallen 60 or more days past due within nine months of the modification.

Earlier this week, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, ripped the administration’s HAMP efforts and suggested the program might be doing more harm than good.

Other critics have suggested that foreclosure-prevention efforts are doomed to fail without an element of mortgage principal forgiveness. That view may be gaining mainstream acceptance, given the administration’s new guidelines and Bank of America’s announcement earlier this week that it would start offering home loan forgiveness.