HAMP was conceived promptly to meet a crisis, so banks had to prepare to implement it quickly.  Participation in the program was voluntary and even banking giants who had developed their own programs for distressed homeowners did not embrace HAMP immediately.

Though banks have been paid incentives through all phases of HAMP, they have been slow to process modifications; the government has only paid $50 million.  Out of 3-4 million homes that Making Home Affordable hoped to saved, there have been only 170,000 permanent loan modifications so far.

There is lots of red tape involved in modifying a loan, but banks are still not set up to handle the waves of foreclosure, despite increased hiring of processing staff.  As a result, it takes a long time to process the paperwork that is justifiably involved in changing loans.

The Underlying Issues…

Banks may be dragging their feet as they, of course, prefer to have borrowers adhere to original loan terms.  In their defense, the ownership of these loans is complicated.  Many are backed by investors, so multiple investors hold mortgages.  How can these investments be valued?  Who loses what and how much?

Almost immediately, an irony shone through.  HAMP could only be successful if banks were on board, but forcing them to comply was (and is) an issue in itself.  In a free society, can a government force private businesses to rewrite loans and thereby threaten their investors’ pocketbooks?

The current crisis requires that banks pick up the pace in their responses and do so in a way that balances their needs as a business, the concerns of their investors, and the plight of distressed homeowners.  This is a tall order, but one that banks must fill if they ever hope to return to business as usual.

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Under the latest change to the program, banks must offer 3-6 months payment relief to the unemployed. Banks are encouraged (but not required) to cut principle payments, which will be compensated by $75 billion in diverted HAMP funds.

The new guidelines are an attempt to address two major causes of foreclosure: unemployment and negative equity. The crisis started among subprime mortgages that reset but spread to other groups – especially those who lost their jobs or saw their housing values dive. When HAMP was hatched last year, it immediately met criticism because it did not adequately address either problem.

In the original program, HAMP did not demand that principal balances on loans be reduced – even though evidence available at the time showed that this was the most effective way to approach the problem, especially in view of the growing negative equity problem.  Now banks will be offered incentives to reduce principle, but it is still not mandatory that they do so.

The crisis is far from over. Over the next two years, 8 million more foreclosures are anticipated.  Pay-option mortgages will reset, making house payments so large homeowners cannot keep up. Many underwater homeowners finally give up, out of necessity or strategic decision. The current reinvention of HAMP is only expected to help a few hundred thousand people, a couple drops of water in a predicted tsunami of foreclosures.

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Homeowners with the ability to pay the mortgage they agreed to when they got the loan are one intended audience for the Making Home Affordable plan set in place by President Obama in February, 2009.  Borrowers with Fannie Mae or Freddie Mac-backed loans held by participating lenders can qualify for loan modifications that hold payments to 31% of incomes.

How the President’s Plan Works

For someone whose payment has risen to 45% of their income, the lender must absorb the loss to reduce the payment to 38%; the government will pay the difference between 38% and 31%. To reach this goal, the interest rate can be reduced to as low as 2% for five years.  Participants are encouraged to work with HUD counselors to assess their housing situation.  The program is free.

Lenders receive incentives when they successfully complete a loan modification, but lenders are so understaffed in their departments that they are slow to respond to eligible homeowners.  At this point 360,165 trial modifications have been started and 571,354  offers made; this represents about 12% of the 3-4 million eligible homeowners expected to be helped. In July, President Obama chided the lenders and asked them to increase hiring to assure that at least 500,000 trial modification are in place by November, 2009.

The original plan was limited to mortgages that were 105% of the value of the home; but this was increased to 125% in July.   In hard hit areas of the country like Nevada, California, and Florida, where percentages of “underwater” mortgages are high, many are disqualified from participating in the program. Critics allege that, because the program does not mandate principle reduction and because lenders have been slow to respond, the program will fall short of its goal of how many people it will help.  The President admonished lenders and loan servicers to increase hiring to assure that 500,000 modifications are in progress by November, 2009.

Loan Modification Won’t Work for Some

Unfortunately, during the housing boom, some homeowners bought homes that are too expensive for them, perhaps by overstating their incomes.  Lured by easy credit terms during the housing boom, these homeowners now find themselves in homes too expensive to heat, maintain, and insure, as well as pay for.  Others have  lost their jobs in this period of high unemployment and may not be able to predict when they will be working again or if their salaries will remain the same.

A loan modification, especially one that doesn’t significantly reduce the payment, can only prolong the agony of foreclosure in these cases.   For people in this condition, as well as for people who don’t want to keep the home, there are better alternatives than loan modification to prevent foreclosure.

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It is too good to be true. Though all the great economic and social thinkers in the country are struggling to find a solution to the housing crisis, you have found the answer at 3 am. So you call and the company promises to solve all your foreclosure problems, a dream come true!

How the Programs Work

You find they want an upfront payment, often equal to a month’s mortgage payment. This is a stretch for you, but maybe worth it. They say they will intercede with your lender. They may ask to you to sign over a deed to the property. You think all is well until your lender contacts you and says that because they have not heard from you or received any payments, they will have to take further foreclosure action. You are confused, you are mad, you are devastated. Then you realize: YOU’VE BEEN DUPED by foreclosure scammer!

The company may not have made with contact the lender, while the fee you paid probably never got to your lender, though you got a phony document that the foreclosure has been set aside. You may owe your lender more than you did before you called for “help.” You may receive a bankruptcy filing in the mail, filed in your behalf, without your knowledge. You may end up with more legal bills, a poor long-term credit picture that will make it hard to buy or rent for 10 years, and perhaps, have no home if he has signed over the deed.

Types of Scams

There are many variations on these scams, but in any case, you usually end up in worse shape. Foreclosure scams fall into three main categories:

Phantom help: The company promises to contact your lender, which they may or may not do, regardless of what they tell you. They may fill out some basic paperwork you could have completed yourself.

The bailout: The company offers to buy the home and rent it back to you until you can buy it back. Many times, they pocket what you pay while never dealing with your lender, so you end up with no property and no place to live.

The bait and switch: The company may have you sign documents to make the mortgage current, but actually you are signing over your home.

Free Help Available

Not all companies who charge a fee for mortgage help are scammers, but if you’re at risk of foreclosure, legitimate free help is available from several sources:

The Federal Government through Making Home Affordable. Even if you do not ultimately qualify for this program, there is plenty of free or very low cost help available from HUD-approved counselors and non-profit groups that will either help you stay in your home or move on to a new stage in your life. Ironically, since the government started its program, foreclosure scams have actually been on the rise.

The State of Maryland through the HOPE Program. HOPE (Homeowners Preserving Equity) is committed to help both owners and renters affected by impending foreclosure. Homeowners can find information about free foreclosure prevention counseling by calling the Maryland HOPE Hotline at 1-877-462-7555 or by visiting our counseling page. More Myths and Facts about Foreclosure Prevention are revealed on their website.

If you want to sell your home quickly and move on with your life, Express Homebuyers can help with that. We can buy your home outright or list it for sale. Fast!