On March 4, 2009, the Treasury announced the release of details for Making Home Affordable, which is comprised of two programs: The Home Affordable Refinance Program and the Home Affordable Modification Program. In total, these programs aim to help 7 to 9 million homeowners by making mortgages more affordable and by helping to prevent foreclosures.

The Home Affordable Refinance Program seeks to provide 4 to 5 million homeowners with the opportunity to refinance first mortgages to take advantage of the historically low mortgage interest rates.

The following criteria must be met to be eligible for this Program:

  • the home is one to four unit and owner occupied;
  • the loan is owned or controlled by Fannie Mae or Freddie Mac;
  • the mortgage payments are current;
  • the amount owed on the first mortgage is not more than 105% of the current market value of the home; and
  • the borrower has a stable income to support the new mortgage payments.

Homeowners looking to take advantage of this Program, should note two things: First, a borrower who is delinquent on first mortgage payments is ineligible. Second, only first mortgages are altered – second (or third) mortgages cannot be altered under this Program, which means a borrower’s eligibility will depend, in part, on any second (or third) mortgage holder agreeing to maintain a junior position even after the first mortgage has been altered.

The Home Affordable Modification Program seeks to avoid as many as 3 to 4 million foreclosures by providing mortgage servicers and mortgage holders financial incentives to modify existing first mortgages. Like the Refinance Program, only certain homeowners are eligible to take advantage of the Home Affordable Modification Program. The conditions for eligibility in the Home Affordable Modification Program include the following:

  • the home is one to four unit and owner occupied;
  • the unpaid principal balance of the first mortgage is equal or less than $729,750, for one unit; $934,200 for two units; $1,129,250 for three units; and $1,403,400 for four units;
  • the loan was originated prior to January 1, 2009;
  • the first mortgage payment is greater than 31% of the homeowner’s gross monthly income; and
  • the first mortgage is no longer affordable due to a change in income (e.g., lost job) or expenses (e.g., the mortgage interest rate has adjusted to a higher rate).

This Modification Program provides many financial incentives for mortgage servicers and mortgage holders, as well as for homeowners who are able to meet the terms of their modified mortgages. For instance, after a three-month test period, servicers will receive $1,000 for each modification and up to $1,000 each year, for up to three years, for each modification that remains successful. In addition, if the modification takes place before the homeowner is delinquent, mortgage holders will receive $1,500 for each modification and servicers will receive $500. Homeowners who successfully perform their obligations under the modified mortgages will have their principal balance reduced by up to $1,000 each year for five years, with such reduction to be made via direct payments to the mortgage servicer.

Under this Program, the Treasury also shares in certain costs associated with reductions in monthly payments amounts. Although participation is completely voluntary, given the financial incentives, the government anticipates that most mortgage servicers will participate. All participating servicers must agree to review every potentially eligible borrower who inquires about the Program.