What is the position of “Principal reductions” under HAMP?
There were criticisms on the progress of HAMP – Home Affordable Modification Program – devised to lower the monthly payments of troubled borrower-home owners, primarily through interest rate cuts. Both the bailout watchdog committee and Democrats in Congress sustained their criticism and finally The Treasury Department outlined a plan in April that calls for principal reductions, as the only way to address the grievances of underwater homeowners. But that plan is yet to kick off.
In the meantime, according to the Congressional Oversight Panel’s Chair, Harvard Law Professor, Elizabeth Warren, by their April report, the foreclosure crisis did not show any signs of abating. In that report it is mentioned “principal forbearance was rare and principal forgiveness rarer still. Deferred principal accounted for about 28 percent of the mortgage modifications, while only six percent of them involved principal cuts. An additional six percent incorporate principal cuts and deferred principal.”
The report noted “The Panel has concerns as to whether the modifications make homeownership sufficiently affordable to avoid foreclosure, given borrowers’ broader circumstances. As noted previously, the program without considering the existence of junior liens leaves borrowers still paying a significant percentage of their income for housing. This is particularly problematic because most HAMP modification recipients are underwater.”
The Panel’s report dealt with in detail the problem thus – “This points to the problem with the lack of principal forgiveness in HAMP up to this point. Lack of principal forgiveness means that homeowners will continue to be underwater. It also means that more of each payment will be going to interest, rather than paying down principal, and it may mean that some borrowers have to pay for longer period of time. All of these factors increase the re-default risk on modified mortgages, and to the extent that a permanent modification is not sustainable, it merely delays a foreclosure and the stabilization of the housing market.”
The report pointed out that as in April, less than a quarter of eligible homeowners have converted from temporary trial modification plans into five-year plans. Treasury originally forecast up to a 75 percent conversion rate. And while it’s too early to tell the rate at which these modified loans will default, Treasury estimates a 40 percent re-default rate.
But that was in April – we are in July now and yet to see “principal reductions” as planned.
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[...] There were criticisms on the progress of HAMP – Home Affordable Modification Program – devised to lower the monthly payments of troubled borrower-home owners, primarily through interest rate cuts. Both the bailout watchdog committee and Democrats in Congress sustained their criticism and finally The Treasury Department outlined a plan in April that calls for principal reductions, as the only way to address the grievances of underwater homeowners. But that plan is yet to kick off. Read More… [...]