A Primer on the Homeowner Affordability and Stability Plan

The Federal government’s latest attempt to shore up the struggling U.S. housing market is the Homeowner Affordability and Stability Plan (“HASP”), which was announced by President Obama on February 18, 2009 and which was finally implemented on March 4, 2009. The HASP program encompasses both a loan modification program and a loan refinancing initiative.

In contrast to the First Time Homebuyer Tax Credit initiative, which sought to affect the demand side of the housing sales equation by incentivizing the purchase of homes, HASP aims to affect the supply side, by reducing the numbers of lender-mediated home sales which arise from foreclosures of defaulted home loans.

Loan Modifications Under HASP

HASP’s modification program offers help to borrowers who are already behind on their mortgage payments or who are struggling to keep their loans current, thereby avoiding foreclosure, by modifying troubled loans to achieve a payment the borrower can afford. By providing mortgage lenders with financial incentives to modify existing first mortgages, the Treasury hopes to help as many as 3 to 4 million homeowners avoid foreclosure regardless of who owns or services the mortgage. Lenders are likely to lower payments mainly by reducing loan interest rates. However, the program offers incentives for principal reductions and at your lender’s discretion modifications may include upfront reductions of loan principal.

HASP’s modification program, unlike other loan modification programs, a borrower does not have to be behind on the borrower’s mortgage payments in order to be eligible for a modification under HASP. Borrowers who are struggling to stay current on their mortgage payments may be eligible, without regard to whether the borrowers are late on their mortgage payments, if their income is not sufficient to continue to make their mortgage payments and they are at risk of imminent default. This may be due to several factors, such as a loss of income, a significant increase in expenses, or an interest rate that will reset to an unaffordable level.

In general, a borrower qualify for a mortgage modification if (a) the borrower occupies the house as the borrower’s primary residence; (b) the borrower’s monthly mortgage payment is greater than 31% of the borrower’s monthly gross income; and (c) the borrower’s loan is not large enough to exceed current Fannie Mae and Freddie Mac loan limits. Final eligibility will be determined by the borrower’s mortgage lender based on the borrower’s financial situation and other applicable program guidelines.

HASP’s modification program is limited to first mortgage loans on primary residences. If a borrower owns a house that is used as a vacation home or that is rented out to tenants, the mortgage on that house is not eligible. If the borrower used to live in the home but has since moved out, the mortgage is not eligible. A mortgage on 2, 3 and 4 unit properties are eligible as long as the borrower lives on one of the units as a primary residence. As part of HASP’s qualifying process, your mortgage lender will check to see if the dwelling is the borrower’s primary residence.

To encourage borrowers who work hard to retain homeownership, HASP provides incentive payments as a borrower makes timely payments on the modified loan. The incentive will accrue on a monthly basis and will be applied directly to reduce the borrower’s mortgage debt. Borrowers who pay on time for five years can have up to $5,000 applied to reduce their debt by the end of that period.

Refinancing Under HASP

HASP’s refinancing provisions offer help to eligible borrowers who stay current on their mortgages but have been unable to refinance to lower their interest rates because their homes have decreased in value. Such borrowers may now have the opportunity to refinance into a 30 or 15 year, fixed rate loan. Through the program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they hold in their portfolios or that they placed in mortgage backed securities.

The objective of HASP’s refinancing program is to provide creditworthy borrowers who have shown a commitment to paying their mortgage with fixed, affordable payments that are sustainable for the life of the loan. All loans refinanced under the plan will have a 30 or 15 year term with a fixed interest rate. The rate will be based on market rates in effect at the time of the refinance and any associated points and fees quoted by the lender. Interest rates may vary across lenders and over time as market rates adjust. The refinanced loans will have no prepayment penalties or balloon notes.

Eligible loans include those where the new first mortgage (including any refinancing costs) will not exceed 105% of the current market value of the property. For example, if a property is worth $200,000 but the borrower owes $210,000 or less, the borrower may qualify. The current value of the property will be determined after you apply to refinance.

As long as the amount due on the first mortgage is less than 105% of the value of the property, borrowers with more than one mortgage may be eligible to refinance under HASP. Eligibility will depend, in part, on agreement by the lender that holds the second mortgage to remain in a second position (i.e., the second mortgage holder must subordinate to the refinanced mortgage), and on the borrower’s ability to meet the new payment terms on the first mortgage.

Limitations of the HASP Program

HASP’s effectiveness, particularly the refinancing provisions, is limited by the following program restrictions:

• HASP’s refinancing program is limited to loans held or securitized by Fannie Mae or Freddie Mac. This will exclude a great number of mortgage loans from the program, although a modification may be possible if hardship circumstances exist.

• The consent of second mortgage holders is required under the refinance provisions. It is uncertain what incentive a second mortgage holder might have to facilitating a refinance of the first mortgage where no funds are used to pay all or a portion of the second mortgage.

Conclusion

With the launch of the Homeowner Affordability and Stability Plan loan modification and refinancing programs, the Federal government has now attempted to directly effect both the supply and demand sides of the U.S. housing market, and only time will tell whether these attempts prove successful.

Jeffrey C. O'Brien is a partner with Mansfield Tanick & Cohen, and an MSBA Board Certified Real Property Law Specialist. He is a frequent guest of the WCCO Real Estate Radio Hour and can be reached at 612-341-1263 or via email at jobrien@mansfieldtanick.com.