Home Affordable Modification PlanWith nearly 25% of all mortgage holders in the U.S. underwater – meaning they owe more on their house than it's currently worth – it's no wonder that a new part of the Home Affordable Modification Program (or HAMP) taking effect April 5 is garnering big ink, including a page one story in The New York Times.

This one is called HAFA -- Home Affordable Foreclosure Alternatives.

What is it? Under the new program, lenders will be offered incentives to allow some underwater homeowners to sell short – selling their homes for less than they owe on their loans and being let off the hook for the rest.
Another option under HAFA allows homeowners to deed your house back to the lender (what is called a deed in lieu of foreclosure).

Is it that big a deal? Not according to the Treasury Department. Spokeswoman Meg Reilly says they don't see this as a panacea for the foreclosure crisis but rather the next in line of alternatives for people for whom loan modifications don't work. They don't expect that short sales have "massive uptake." That said, let's take a look at who qualifies and how it works.

Eligible homeowners include those who:
  • Didn't qualify for loan modifications under the already-exisiting Home Affordable Modification Program (often because they lacked the income.)
  • Received a trial loan modification under HAMP but not a permanent one.
  • Missed two consecutive payments on their modified loans.

Here's how the program works:
  • In a short sale, the homeowner sells the property for less than the full amount due on the mortgage. The amount the property is allowed to be sold for is set in advance using an appraisal from an independent real estate agent. The homeowner is not the person who gets to decide what the minimum value can be (in fact, the homeowner won't even know what this value it is.)
  • In a Deed in Lieu of Foreclosure, the homeowner gives that home and its title -- free and clear of other mortgages -- back to the servicer.

What makes this program different from the portions of HAMP that have been in place for month are the incentives for all the parties involved. There is $1,500 in cash for the homeowner (it's being called a "relocation allowance"). There's another $1,000 for the holder of the primary mortgage and another $1,000 for the holder of the second mortgage, in the event that there is one.

And there are other plusses. As a result of a short sale, banks and lenders don't have to go through the process of foreclosing on a home; that can cost $20,000 to $40,000 a pop.

Short sales also put new people into homes that might sit empty in foreclosure. Having a new owner to mow the lawn and paint the shutters is good for the value of the neighborhood.

Finally, the credity of the affected homeowner takes less of a hit in a short sale than if they were to go through foreclosure.

So what's a person who can't pay their mortgage to do if they're not eligible for a short sale? Call your lender and explore the following alternatives:
  1. Refinancing your mortgage the old-fashioned way. Mortgage rates are still very low. Four million people refinanced last year. You may be able to qualify for some sort of adjustable rate loan that can help you make lower payments until your income comes back.
  2. Getting a loan modification under the government's existing Home Affordable Modification Program. A lot of people believe incorrectly that if they don't have a job, they can't get a loan modification under the existing program. That's not true. Unemployment insurance, as long as you're going to be receiving it for at least the next nine months, will count toward a loan modification.
  3. Looking into reduction of principal. There are some small mortgage servicers like Ocwen Financial that are starting to modify principal (the balance owed on your loan) when they believe it's necessary. This is not part of the existing government program, but keep watching. According to the Treasury Department's Reilly this sort of a "tweak" is still being talked about as a possibility.

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August 02 2013 at 8:14 AM Report abuse rate up rate down Reply