The Federal Housing Finance Agency announced on Friday that it was extending the Home Affordable Modification Program (HAMP) for another year - through December 13, 2013 - and that Freddie Mac and Fannie Mae would continue as financial agents for Treasury in implementing the changes it then announced.  The press release also said the two GSEs would "extend their use of HAMP Tier 1 as the first modification option through 2013" and that they were already in alignment with HAMP Tier 2 and no further changes were necessary.

However, the Treasury Department, which jointly administers HAMP, simultaneously announced what appear to be some significant changes in the program.  Perhaps Timothy G. Massad, Assistant Treasury Secretary for Financial Stability, was merely providing the English translation of the FHFA press release or perhaps there is a division in the ranks.  In either case, here is the information he provided in his blog posting.  

The Treasury Department intends to triple the incentives offered to investors holding distressed loans to encourage them to participate in reducing the principal for those loans.  Under the new guidelines, Treasury will pay from 18 to 63 cents on the dollar to investors, depending on the degree of change in the loan-to-value ratio of the individual loans.

While principal reduction has always been available for modifying proprietary loans under the HAMP program (it even has its own acronym, PRA) it has not been widely used.  Of over 900,000 permanent modifications completed since the program began, only 38,300 are classified as utilizing principal reduction. 

As we have previously reported, FHFA has resisted all suggestions that the GSEs also include principal reduction in their tools for dealing with distressed loans where borrowers are upside down in their mortgages.  According to Massad, Treasury has notified FHFA that it will pay principal reduction incentives to Fannie Mae or Freddie Mac as well if they allow servicers to forgive principal in conjunction with a HAMP modification. 

In its press release FHFA said of the Treasury proposal: 

"FHFA has been asked to consider the newly available HAMP incentives for principal reduction. FHFA recently released analysis concluding that principal forgiveness did not provide benefits that were greater than principal forbearance as a loss mitigation tool. FHFA's assessment of the investor incentives now being offered will follow its previous analysis, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects."

Again, according to Treasury, HAMP will be expanding its eligibility to reach a broader pool of borrowers.  An additional evaluation process is being implemented that will allow servicers to recognize that some borrowers who can afford their first mortgage payments still struggle because of other debt.  Some analyses of HAMP have found that many borrowers could not qualify for a modification solely because their housing expenses were already below the 31 percent ceiling allowed by HAMP guidelines.  This ceiling will now be flexible enough to include secondary debt such as medical expenses or second liens in the evaluation ratio. 

Eligibility will also be expanded to include properties that are tenant-occupied as well as vacant properties that the owner intends to rent.  According to Massad, this will serve to further stabilize communities with high levels of vacant and foreclosed properties as well as expanding the rental pool as has been suggested by the Federal Reserve and others.