Time to Modify HAMP?

January 22, 2010

The New York Times reports on Jan. 21 that the Obama Administration is expected to announce significant changes to its Making Home Affordable loan modification program as early as next week.  

Likely changes include altering the formula used by lenders to determine whether a modification is the best economic option for borrowers by giving more weight to modifications that include a write down of principal.  As I have written earlier, principal modifications are emerging as the key variable in creating lasting, stable mortgage modifications.

Another area for possible change would be how to treat borrowers who are currently unemployed.  This could include a period of forebearance to give borrowers more breathing room to get back on their feet.  More radical proposals to provide direct loans to such households seem unlikely to emerge from the current deliberations.

The loan mod program has been plagued by long start up times, confusion and lost paperwork as lenders try to scale up parallel underwriting practices in their servicing shops.  One contributor to these delays have been documentation requirements that were adopted to prevent fraud, but seem to have been more effective in preventing legitimate modifications.  Streamlining of required documents and quicker acceptance of initial qualifying material would be a big help in reducing the paper chase that has frustrated so many borrowers.

In addition, many borrowers have been confronted with foreclosure filings and even evictions while waiting for their applications to clear or while they are in the 3-month trial modifications that are the first step under the plan.  Consumers who are in bankruptcy are another area of concern for advocates.  Clarifying their eligibility for loan mods would also be a significant advance in the program.