Principal Reductions in HARP, HAMP and Hardest Hit Funds
Freddie Mac and Fannie Mae have paved the way for mortgage principal reductions in the HAMP programs.
Recent changes in some of the Hardest Hit Fund programs, paved the way for principal reductions. The FHFA (Federal Housing Finance Agency) Director Edward DeMarco has strongly opposed principal reductions as a method to solve the housing crisis, claiming it encourages people to strategically default on their mortgages. However, the new changes in the Hardest Hit Fund programs don’t expose the FHFA supervised Fannie Mae and Freddie Mac to financial loss. The money for the program will be funded by state run Hardest Hit Funds.
This is good news for a few underwater borrowers in financial hardship, in a limited number of states. If you are having trouble paying your mortgage, then it is important to learn about your options to avoid foreclosure and minimize your costs.
Background: HARP, HAMP, and Hardest Hit Funds
In 2009, the Obama administration established the Making Home Affordable program to help solve the housing crisis. A number of programs were set up to help borrowers suffering severe financial difficulties and/or a steep drop in the price of their property. Among the main programs are the following:
- Loan Refinance for Underwater Borrowers: HARP
- Loan Modification for Financially Distressed Borrowers: HAMP
- Short Sale or Deed-in-lieu Program for Underwater Borrowers: HAFA
The Obama Administration also established, in 2010, the Hardest Hit Fund (HHF). The HHF has a $7.6 billion budget over 18 states and Washington, D.C., areas that especially suffered from high unemployment, a drastic drop in home values, and a large increase in foreclosures.
The HHF varies from state to state, and is run through the state’s Housing Finance Agencies (HFAs). Most states have programs to help financially distressed borrowers reinstate their loans and/or assist borrowers with their monthly payments for a limited time. Some states also have other programs that deal with mortgage refinance, mortgage modification, and assistance to transition to more affordable housing.
The Conflict: No Principal Reduction for Fannie Mae and Freddie Mac Loans
Three main problems existed in the Hardest Hit Funds that prevented Fannie Mae and Freddie Mac Loans from participating in the programs:
- New Liens: The Hardest Hit Fund programs usually involve a new 0% loan to the borrower, which is forgiven after a certain period of time elapses, if the borrower fulfills all of his commitments and eligibility requirements. In exchange for the aid, a lien is registered on the borrower’s property. (The new lien is in an inferior position to the existing mortgage loans).
- Principal Forgiveness: Fannie Mae and Freddie Mac do not allow for principal forgiveness in their loans. The PRA (Principal Reduction Alternative) program, for example, requires for principal reductions in a loan modification, but Fannie Mae or Freddie Mac loans are excluded from the program. Some HHF programs, such as California’s Keep Your Home California, allow for principal reductions, but require lender participation.
Changes in HHF regulations and Fannie Mae/Freddie Mac Guidelines
Due to changes made by the states and the GSEs, certain states are allowing for principal reductions in their HARP and HAMP loan modifications.
Hardest Hit Fund changes included state legislation that abolished the need:
- To register a lien on the property.
- For lender forgiveness in the loan.
Fannie Mae and Freddie Mac changes included the following:
- May Guidelines and HARP: These guidelines allow for the use of HHF funds toward a HARP loan, as long as no lien is placed on the property. The funds can be used to pay down the balance of the existing loan at the time of the refinance and/or pay for closing costs including financing costs, and prepaids/escrow costs. According to the Nevada HHF Web site:
- "Nevada is the ONLY state that currently offers principal curtailment in conjunction with HARP 2.0. The Nevada Hardest Hit Fund is at the forefront of this initiative to provide the extra assistance to help families stay in their homes. "
- Sept 2012 Guidelines and HAMP: These guidelines specifically instruct servicers to accept funds from HHF that are part of a loan modification program and meet further Fannie Mae/Freddie Mac requirements. For example, if there is a change in payment schedule only, and the borrower meets the HHF eligibility, then the servicer must accept the funds. If the borrower is in the midst of a HAMP modification, then the servicer must follow rules regarding the application of funds and using a principal forbearance (pushing off payment of the loan), until a permanent HAMP is in place. The HHF funds can only be applied to amounts allowed in the principal forbearance.
Hardest Hit Fund: Will it Help Me?
The Hardest Hit Fund is limited in scope. In order to see if you can benefit from the program, I recommend that you:
- Check out the Bills.com article about Hardest Hit Funds and see if your state participates.
- If it does participate, then check out the state’s website and see what types of programs are offered and what the eligibility requirements are. Many states only offer the HHF for unemployed.
- Contact the representative, as shown on the official state Web site.
However, if you are having trouble paying your mortgage, then you should also explore all your foreclosure alternatives, including programs that are appropriate for your type of loan including HARP, HAMP and HAFA programs for Fannie Mae or Freddie Mac loans. There are
Speak to your lender and look into modification or short sale alternatives. Although it is positive news for homeowners that Fannie Mae and Freddie Mac are allowing any principal reductions, it is too limited in scope to help most borrowers. According to the LA times, only about 8,000-9,500 borrowers will benefit from the September change. Only people who make an effort will benefit from the programs available.