Important:  This brief summary is provided as a quick guide only; a link to the official details and an online eligibility assessment tool provided by the U.S. Dept. of the Treasury is provided below.

UPDATE:  On March 5, the House passed the “cramdown” legislation, which would allow Bankruptcy Judges to modify the mortgage on a owner-occupied home, provided the homeowner first made a good faith effort to complete a loan modification with the lender.  The measure now goes to the Senate where it is expected to encounter stiff opposition from lenders.  See Washington Post article.

As promised, the U.S. Dept. of the Treasury released the Homeowner Affordability and Stability Plan (HASP) Guidelines on March 4, 2009, to take effect immediately.  There are two basic components of the Making Home Affordable plan:  refinancing and modification.  Most of this discussion will focus on the Home Affordable Modification Program, but first a quick comment about eligibility for the refinance component.

To be eligible for the Home Affordable Refinance program, the property must be owner-occupied, the borrower must establish they have income to support the new mortgage debt, and the amount of the first mortgage cannot exceed 105% of the current market value of the property.  Junior lienholders must agree to subordinate, borrowers may not take cash out, and borrowers who are delinquent will not qualify.  Details for the new refinance options for existing Fannie Mae Loans are set forth in FannieMae Announcement 09-04, released March 4, 2009.

To be eligible for the Home Affordable Modification program (HMP), the property must be owner-occupied, not vacant or abandoned, the current mortgage payment must be more than 31% of the borrower’s gross monthly income, and the borrower must have experienced a significant change in income or expenses to the point where the current payment is no longer affordable.  The borrower need not be delinquent, but they must be at risk of “imminent default.”  Jumbo conforming loans up to $729,750 are eligible for the HMP.  Participating servicers are required to follow specific steps in the Guidelines to attempt to reduce the monthly mortgage payment to as close to 31% Debt-to-Income (DTI) ratio as possible.

The modification process, referred to as a “Waterfall” process, starts with a determination of Monthly Gross Income, then validation of total First Mortgage Debt — monthly PITIA.  Servicers are then required to capitalize all arrearages, and target achieving a DTI of 31% by incrementally reducing interest rates down to a minimum of 2% for a five-year period.  (After that, the rate will increase by no more than 1% per year until it reaches the Interest Rate Cap.)  The next stage in the “Waterfall” process is to extend the term up to 40 years, starting with the date of the modification.  If this is insufficient to achieve a DTI of 31%, the servicer is expected to forebear principal, to be due upon maturity date, sale of the property, or upon payoff of the interest-bearing balance.  No interest will accrue on the forbearance amount.  Under no circumstances may the modified balance due be lower than the current market value of the property.

No principal reductions are required under the HMP, but lenders may, at their option, elect to reduce principal if necessary to achieve a 31% DTI.  The program will reimburse servicers for a portion of the cost of a principal reduction.  Each borrower will undergo a 90-day trial period.  No incentives may be paid until the 90-day trial period has been completed.  Lenders may not charge the borrower any fees or charges for this modification process.  Junior lien holders will be required to subordinate to the modified loan, and the HMP provides an incentive payment up to $1,000 to pay off junior lien holders, and an additional $500 incentive payment for efforts to extinguish  second liens.

If, after going through the process, it is determined that modification is not an option, the Guidelines suggest that all loss mitigation options be considered, including any possible refinancing options available outside of the program, and if homeownership retention is not possible, program counselors should discuss short sales and deeds in lieu of foreclosure as ways to help the borrower transition to more affordable housing.  Incentives for participating services are available for alternative approaches, and borrowers may be eligible for relocation expenses to effectuate short sales and deeds-in-lieu of foreclosure.  The ultimate objective is to minimize the impact of vacant and abandoned properties on local communities.

Foreclosure actions will be suspended during the process.  Therefore, it is important that any person facing foreclosure initiate all steps necessary to start the process immediately.  Persons in this situation are advised to contact their lender, and to call the Homeowner’s HOPE Hotline at 888-995-HOPE.  To find out if you may be eligible for a refinance or loan modification under the Program, you can go online determine whether or not you are eligible.  This self-assessment tool is made available by the U.S. Dept. of the Treasury at www.financialstability.gov.

Get ready for a perfect storm — a Category 5 foreclosure tsunami.  The first wave was launched on February 17 when FannieMae announced an extension of the temporary halt to foreclosure sales (Lender Letter) to March 6, 2009.  The second wave came on February 18 as President Obama announced the Homeowner Affordability and Stability Plan (HASP).  This Plan included the start of the third wave of this storm — the announcement that Guidelines will be released on March 4, 2009.  When these three events collide on or around March 4 - 6, hundreds of thousands of homeowners, investors and tenants are going to wake up to find themselves adrift in a stormy sea of chaos with no life preserver.

Unless the Federal government comes up with a miracle when it releases the much-anticipated Guidelines on March 4, we can anticipate a sharp increase in the number of foreclosures that will be filed and/or processed.  Moreover, the sheer number of foreclosure actions currently pending in the nations’ State courts will have to be processed off the books.  The same day as President Obama announced his plans for mortgage relief, the WSJ carried an article about a Judge in Lee County, Florida, running a “rocket docket” to clear the backlog of pending foreclosure actions.  He only had two questions for the homeowners:  Are you current?  Do you still live there?  For those who answered “No” to the first and “Yes” to the second, he gave them 60 days to work out a deal or move out.  President Obama, in his Feb 18 speech, pretty much left only one option for those who were not current on their payments — Bankruptcy court.  Although lenders generally would like to avoid this option, borrowers have little hope that the results will be any more favorable.  There is very little sympathy for the borrowers in these situations, and therefore very little political will to launch a rescue effort.

Adding to the chaos of this bleak forecast is the fact that hundreds of thousands of borrowers are being swindled by loan modification scams promising to “stop foreclosure now” and “save your home.”  Although these so-called “loan mod experts” have been around for years, their business took off in the past couple of years as the Federal government put pressure on lenders to voluntarily work out new terms in order to keep people in their homes.  Unfortunately, approximately 60% of the loan modifications that were worked out have gone back into foreclosure.  The blame seems to fall evenly between the lenders’ meager concessions and the economy’s continuing decline.   It doesn’t matter what new terms you agreed to in January if you got laid off in February!

Unless the HASP Guidelines includes a miracle and not just a placebo of unrealistic conditions, and unless Fannie Mae and the lenders extend the moratorium on foreclosures, we can expect foreclosure hell to break loose in early March.  Sadly, the impact will be devastating on families, neighborhoods and communities across the country that are already suffering from the blight of foreclosures.  The Obama Administration must recognize that this situation is akin to a Category 5 economic storm that will rage across the entire country, and must respond accordingly.  Failure to do so will make the Bush Administration’s response to Katrina seem benign in comparison.