Debt Writedown Key to Obama’s New Foreclosure-Fix Phase

Treasury Secretary Timothy GeithnerA greater emphasis on principal writedowns or limited forgiveness will mark new changes to the government’s much-criticized foreclosure prevention program in coming weeks as realization sets in that interest rate reductions and term extensions are not enough.
One plan with some debt forgiveness will establish a new and easier “standard” for short sales, a Treasury official said. Another new program will reduce monthly payments for up to six months for unemployed homeowners, matching 31 percent of previously documented income.
But the biggent enhancement is a new principal writedown option made possible through refinancing by the Federal Housing Administration. It will allow “underwater” borrowers to reduce their principal to 115 percent of loan-to-value .
The new foreclosure prevent enhancements will be funded through a $50 billion allocation for housing initiatives under the primary bailout vehicle, the Troubled Asset Relief Program, TARP.
The new assistance for the unemployed and the debt writedown alternative will be offered by mortgage servicers participating in the government’s Home Affordable Mortgage Program, which was heavily criticized this week in a report by the Inspector General appointed by Congress to oversee TARP.
The overseer echoed concerns of borrower advocates and mortgage industry experts in concluding that HAMP has failed in only permanently reducing monthly payments of nearly 200,000 borrowers, without safeguards or plans to address a high rate of re-defaults and the growing problem of “underwater” homeowners — those with more mortgage debt than their home is worth.
On April 5, a new short-sale or deed -in-lieu (DIL) alternative to HAMP’s mortgage modification will launch that features some principal forgiveness for borrowers and $1,500 in relocation assistance. Home Affordable Foreclosure Alternatives, or HAFA, is for homeowners who have already qualified for HAMP but have failed mortgage reduction trials.
HAFA forgives the principal difference between the balance of mortgages and the short sale price for borrowers. Although the process requires the mortgage servicer, investor and possibly 2nd-lien holders to meet certain criteria, Treasury officials say HAFA will facilitate what is normally a long and arduous process.
Herbert M. Allison, Treasury’s Assistant Secretary for Financial Stability, spoke about HAFA today in prepared testimony before the House Committee on Oversight and Government Reform. Allison said the program will transform the typical short sale process.
“The Administration expects that many homeowners will avoid foreclosures through HAFA…” Allison said. “We also anticipate that HAFA could help establish standard practices that will ease the use of short sales, which are often much better for a family than a foreclosure sale… HAFA is critical to helping families maintain mobility in the labor force, which has broader economic benefits as well.”
Click here for an FAQ on the HAMP enhancements.
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2 thoughts on “Debt Writedown Key to Obama’s New Foreclosure-Fix Phase

  • March 25, 2010 at 9:00 pm

    UHHHHH.. when are we going to hear about Obama bringing our jobs back from China, India and Mexico? Until those loopholes are closed we’re not going to be able to afford our friggin houses.. What is wrong with this government? It is trying to fix what happens when everyone is employed, rather than GET OUR JOBS BACK!

  • March 25, 2010 at 11:28 pm

    nicolle “What is wrong with this government? ” The people, we have to get together “the power of the many will win over the manipulation of the few” if you feel like i do Because I’m ready to wake up! And i’m looking for my people.

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