Underwater borrowers – Non-FHA, -Fannie & -Freddie mortgages

Here we go again.

For three weeks now, I’ve been going over Federal programs designed to help underwater borrowers with their delinquent mortgages. The first installment covered Federal Housing Administration (FHA) loans – the ones supervised by the Department of Housing and Urban Development (HUD), which is an actual Federal agency.

The past two weeks were spent on programs run by the Federal National Mortgage Association (FNMA), commonly called Fannie Mae, and the Federal Home Loan Mortgage Corporation (FHLMC), known as Freddie Mac. You’ll recall that both Fannie and Freddie are U.S. government-sponsored enterprises (GSEs). Both have been bailed-out by the government which, for all practical purposes, makes both semi-official Federal agencies.

But there are plenty of mortgages out there that aren’t owned or guaranteed by FHA, Fannie, or Freddie. So, what about them?

As part of the overall plans to promote economic recovery and resurrection of the housing market, the Federal government came up with three programs to help struggling homeowners with their mortgages. One facilitates refinances, another modifications, and the third avoiding foreclosure (but still losing the home). Unsurprisingly, the three programs have acronyms: HARP (Home Affordable Refinance Program), HAMP (Home Affordable Modification Program), and HAFA (Home Affordable Foreclosure Alternatives) program. Let’s go over all three.

First, HARP. Unfortunately, HARP applies only to mortgage loans owned by Fannie and Freddie. Since we’re talking about non-Fannie and –Freddie mortgages, let’s scratch HARP right off the bat.

That brings us to HAMP.

HAMP is designed to help responsible homeowners who have been put in difficulty because of financial hardship, whether caused by loss of income or job, or an increase of the interest rate on an adjustable rate mortgage.

For starters, to qualify for HAMP, borrowers have to be able to document their hardship by proving income and expenses. They must also meet the following criteria: 1. be the owner-occupant of a one- to four-family home; 2. have an unpaid balance less than jumbo status ($729,750 for a one-family dwelling with higher balances allowed depending on the number of units); 3. have a first mortgage that was originated on or prior to January 1, 2009; 4. have a monthly mortgage payment (including principal, interest, property taxes, homeowners’ insurance, and homeowners’ association [HOA] dues) greater than 31% of gross monthly income; and 5. show that the mortgage payment can’t be made because of the financial hardship.

Still, there can be obstacles, such as junior liens (i.e. second mortgages, judgments, delinquent HOA dues). It may be that the only way to modify the current first mortgage is to cut the principal balance and base a modified loan on the reduced principal balance. If so, though, what happens to the reduction? Is it forgiven? Probably not. Instead, it may be lopped back in line as a junior lien, which is why an existing junior lien presents an issue. Borrowers need to be sure whether the reduced balance is actually being forgiven or rewritten, either as a junior lien or an unsecured note. Sometimes, these deferred notes may not bear interest for a few years – but they don’t vanish into thin air. Instead, they hang on, even after the home is sold later by the borrower. As always, borrowers need to read before they sign.

So if HAMP won’t work, only HAFA remains.

HAFA procedures help borrowers avoid foreclosure. But HAFA doesn’t keep borrowers in their homes. Instead, HAFA amounts to a way of getting borrowers off the hook of their unmanageable loans by letting them off-load their homes without going through foreclosure. Why should borrowers care? Because foreclosure carries a stigma and causes serious damage to credit, so avoiding it may be a minor benefit. How does HAFA do this? By offering inducements (money) to lenders, borrowers, and junior lien holders and by allowing real estate agents to be paid a commission up to 6%.

The two ways to dodge foreclosure are to convey the home back to the lender (deed in lieu of foreclosure) or to convey the home to someone else for less than is owed to the lender (short sale). Obviously, for either to happen lenders must be on board. To be on board, lenders have to be convinced borrowers don’t qualify under HAMP or have failed the trial modification that HAMP requires. Most likely, lenders will favor short sales over deeds in lieu because lenders won’t have to take back homes themselves if they’re sold to third parties through a short sale. Lenders’ regulators don’t like REOs (the term for real estate owned by lenders) on lenders’ books. Plus, in short sales lenders will know their losses up front. But if lenders take homes back through a deed in lieu, they will then have to list the homes and sell them – maybe for even less.

As with other topics when it comes to owning property and being underwater, be sure to hop on the Internet to check the latest program features. Programs tend to change and be tweaked.

- Morrie Erickson