Posted on March - 28 - 2010
Ways to Wealth: Underwater? Recent Treasury program could toss a lifeline
ElaineZimmermanWays to Wealth
Mark: In my work I meet many people who are facing foreclosure of their residences. Many of them owe a great deal more than the homes are worth. With all the new government programs, is there one that could help these people?
Elaine: Yes, the Home Affordable Modification Program (HAMP), enacted in March 2009, addresses the problem many homeowners face who have mortgages that far exceed the value of their homes — commonly referred to as being “underwater.”
HAMP aims to make the payments on a home affordable to the homeowner based on the borrower’s income, not the value of the home or the outstanding original mortgage.
The U.S. Treasury has partnered with financial institutions to reduce borrowers’ monthly payments to 31 percent front-end debt to income (DTI) ratios. (Front-end DTI is the ratio of PITIA to Monthly Gross Income. PITIA is defined as principal, interest, taxes, insurance — including homeowners insurance and hazard and flood insurance — and homeowners association and/or condominium fees. Mortgage insurance premiums are excluded from the PITIA calculation.)
Treasury will match monthly payment reductions dollar-for-dollar down to the 31 percent DTI ratio after the lender has reduced the payments to no greater than 38 percent DTI. Program payments for borrowers will be made by the Treasury for up to five years of entry into HAMP.
For a borrower to qualify for HAMP, the mortgage must have been originated before Jan. 1, 2009. The home must be owner-occupied, single-family 1-4 unit property. The home must be a primary residence. It may not be investor-owned, vacant or condemned and may not have a first-lien loan with an unpaid principal balance of greater than $729,750. There is no minimum or maximum loan-to-value (LTV) ratio for home eligibility purposes, meaning borrowers who are underwater are not excluded from this program.
To reach the front-end DTI target, interest rates can be cut to as low as 2 percent. This rate will remain in effect for five years. After that time it can be raised each year by no more than 1 percent.
If a lowered interest rate does not achieve the front-end DTI target, the term of the loan can be extended for up to 40 years. If the front-end DTI can be reached by a term longer than that of the present loan but shorter than 40 years a term shorter than 40 years can be initiated. There is no requirement to extend to a 40-year term.
Regarding foreclosure, HAMP guidelines state, “Any foreclosure action will be temporarily suspended during the trial period, or while borrowers are considered for alternative foreclosure prevention options. In the event that the Home Affordable Modification or alternative foreclosure prevention options fail, the foreclosure action may be resumed.”
Questions? Write Elaine at Elainezimm@aol.com. Her Web site is elainezimmermann.com.
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