Judicial Mortgage Restructuring: A Possible Alternative to HAMP

The Great Recession has lead to widespread devaluation of real property and the loss of millions of jobs. Largely as a result of these devastating occurrences, the United States Department of the Treasury estimates that as many as six million families will face foreclosure on their primary residences within the next few years. The Obama Administration responded to this startling statistic by implementing the "Making Home Affordable Program" which includes, among others, the "Home Affordable Modification Program" (HAMP). Nearly a million homeowners had been granted either a trial or permanent mortgage modification under the program at the end of 2009. However, some mortgage bond investors and asset managers are questioning whether or not HAMP is capable of truly supporting the three to four million American homeowners that the Obama Administration expects to aid through the program in the next three years.

How HAMP Works

HAMP allows for mortgage modifications on the first and second mortgages of primary residences of eligible applicants. In order to be eligible for modification, homeowners must have a certain level of debt, a certain mortgage debt-to-income ratio and must be able to make all future modified mortgage payments. Home owners who qualify for HAMP will be granted a three month trial modification. If homeowners make all trial payments on time, they will be considered for a permanent modification.

A mortgage modification re-works the terms of the mortgage contract in order to make payments more immediately manageable. HAMP modifications are constructed so that the mortgage payment equals no more than 31 percent of the homeowner's gross monthly income (GMI). Under HAMP, the following modification methods are explored, usually in order, until the payments reach the level of 31 percent GMI:

  • Lowering the Interest Rate: reducing the interest rate to as low as two percent
  • Extending the Loan Term: extending payments by as much as 40 years
  • Forbearance: deferring a portion of the principal to be paid at a later date

Proposed Alternatives

Those who request modification under the HAMP program but do not qualify for modification must be considered for other aid options including refinance and modifications sponsored by the bank that are not HAMP specific. However, requiring that homeowners be considered for alternatives does not guarantee that alternative aid will be given. In addition, only lenders owed or guaranteed by Freddie Mac and Fannie Mae are required to participate in the HAMP program. All other lenders are provided with incentives to participate, but are not required to do so. These limitations will leave many homeowners without the ability to modify their mortgages and ultimately retain their residences. Even those who do qualify for HAMP modifications may not find them to be sincerely useful beyond prolonging the process of foreclosure.

Mortgage bond investors and asset managers including BlackRock, question whether the structure and limitations of the HAMP program will truly allow for homeowners to keep their homes. Bondholders have questioned whether modifying mortgages which leave home-equity loans unchanged but whose terms are eased will boost the odds that homeowners will default later and have described the process as structured as only aiding homeowners in "delaying the inevitable."

BlackRock proposes allowing judges to modify mortgages on primary residences, which they are not allowed to do under current law. "Judicial Mortgage Restructuring" would arguably better aid homeowners in keeping their homes by first eliminating unsecured debt, like credit cards and undersecured debt like car loans, before modifying mortgages. This process would better preserve the rights of mortgage bond investors and would arguably better aid homeowners in retaining their residence in the long-run. BlackRock argues that if judges were forced to follow a formulaic approach, such an approach would calm the fears of those who think that leaving such decisions to the judiciary would lead to an uneven and unpredictable system.

For Further Reference

Mortgage modifications may aid homeowners in avoiding foreclosure, but it is important to understand the risks involved in accepting a modification. If you are experiencing difficulty keeping up with your mortgage payments or have questions about mortgage modification, please contact an experienced bankruptcy attorney.