HAMP Changes Encourage Principal Writedowns

The Obama administration is expanding its flagging HAMP program to address the two main drivers of foreclosures-job loss and underwater mortgages where borrowers owe more on their loan than the property is worth. Under the new initiative, the Treasury Department will pay incentives to Home Affordable Modification Program servicers for allowing unemployed homeowners to skip three to six months of payments while they look for work. The Treasury also is encouraging servicers to consider principal writedowns for HAMP-eligible borrowers who owe more than 115% of the current appraised value of their home. Incentives will be paid for each dollar of principal writedowns by servicers and investors to bring the loan-to-value ratio below 115% and the monthly payments down to 31%, along with lowering the interest rate and extending the term. Lenders will treat the writedowns as forbearance over the first three years. The principal reduction does not become permanent unless the borrower is current on the modified mortgage for all three years. Treasury also is increasing incentives for investors to writedown or to relinquish their claims on second liens.