The FRB published a working paper which discusses the Home Affordable Modification Program. The paper argues that the Program should help many borrowers avoid foreclosure, as its key features — a standardized protocol, incentive fees for servicers, and a requirement that the first lien mortgage payment be reduced to 31% of gross income — alleviate some of the previous obstacles to successful modifications. However, the paper states that the Program is not well-suited to address payment problems associated with job loss because the required modification in such cases would often be too costly to qualify for the Program. The paper indicates that focus of the Program on reducing the payments associated with the mortgage loan rather than the principal of the loan may limit its effectiveness when the homeowner's equity is sufficiently negative. According to the paper, recent government efforts to establish a protocol for short sales should be a useful tool in avoiding costly foreclosure. Click here for the paper.
Alert November 03, 2009