The New Foreclosure Prevention Plan

The government is out with its foreclosure prevention plan. Officially it is called Making Home Affordable (really, that’s what they named it). There seem to be two components, The Home Affordable Refinance (HAR) program and the Home Affordable Modification program(HAM).

HAR is for Fannie and Freddie borrowers who are making their payments on time. It’s essentially a program to let anyone with an agency loan refinance provided their first mortgage does not exceed 105% of the loan amount. The borrower has to be current on their mortgage and demonstrate that they have sufficient income to service the loan. It’s basically a way to let somewhat underwater borrowers cash in on low rates.

HAM is the program for the borrowers that are sliding towards bankruptcy. The borrower has to demonstrate that basically they’re in trouble or soon will be. There is no loan to value limitation – it doesn’t matter how much your house is under water. Through a combination of lowering rates, extending amortization of the loan and principal modifications the borrowers debt to income level has to be reduced to 31%. Interest rates may be lowered to 2% if necessary to meet the debt to income test. The government will subsidize part of the cost of reducing the payment to 31%.

There are a couple of catches to HAM. The interest rate is fixed for five years and then becomes an adjustable rate. Deferred principal and certain amortization extension plans may result in balloon payments. Sounds like the government is taking a page out of the subprime playbook doesn’t it.

There is a link below that will take you to all of the information you will probably ever want to see on these programs. Fair warning, it’s complicated and long. Based on my first reading I have two thoughts. One, it may well fail simply because of the complexity. Two, it’s going to be one big honey pot of money for mortgage brokers and bankers. Look for more abuse.

After I absorb all of the details, I may have a few more thoughts.

more: here

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