The New Housing Rescue Plan
On Friday, the newest housing rescue effort was announced. All reports show the previous effort was a bit of a failure. Wachovia/Wells Fargo reports a dismal 4% of eligible loans have been done. JP Morgan Chase reports 1% success, Bank of America is on the high end with 16% successful loan modifications.
More than half of loan modifications end up in default again before 1 year. More than 25% of homeowners who have already had new mortgages through HAMP have defaulted again.
Funds from TARP (Troubled Asset Relief Program) will be made available for writing down loans for borrowers who refinanced through the FHA. As much as $14 billion.
Assistance to borrowers is now doubled to $3000 to incent short sales and "deed in lieu" transactions. Incentives to lien holders and investors is increased to $6000.
Borrowers who lose their jobs can apply to have their mortgage payments reduced for 3 - 6 months while they search for a new job.
Lenders of second mortgages will be incented with 10 cents to 21 cents per dollar of principal they write down with an FHA refinance.
Borrowers who find a job but still have a payment more than 31% of income will be considered for a permanent loan modification.
Lenders that refinance through FHA will be required to write down the principal of the first mortgage by at least 10%, with the homeowner having a loan-to-value no more than 97.75%.
Whether the new rules will make the loan modifications more successful is questionable. According to Megan Carpentier with the Washington Independent,
"...homeowners that get modified mortgages that lower their monthly payments, like the ones required by HAMP, don’t fare spectacularly well. Nearly 40 percent of modified mortgages given in 2008-2009 in which monthly payments were lowered by more than 20 percent are in re-default after 12 months; 49.5 percent of modified mortgages with monthly payments lowered between 10 and 20 percent are in re-default in the same period; and 55 percent of those with payments lowered less than 10 percent go back into redefault after 12 months. While not broken down by HAMP and non-HAMP participants, it does indicate that modifying mortgages, particularly when they don’t involve principal reductions, tend to only temporarily hold off default and foreclosure."
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