Smart Borrower Blog

Government May Expand Mortgage Modification Program

Dec 26th, 2012 @ 10:36 PM by Amber Nelson

More than a fifth of the nation’s homeowners are still underwater on their mortgages. This poses a threat to the economy in two ways: first, borrowers who owe significantly more on their loans than their homes are worth are often likely to ‘strategically default’ or purposely fall into foreclosure. This causes a rise in distressed properties on the market and can bring down home prices. Second, being underwater means that homeowners not only have no equity but they have negative equity. When Americans are ‘house-poor’ they tend to spend less and contribute less to economic growth.

The Obama administration has long seen the underwater epidemic as a cause worthy of government aid. The Home Affordable Mortgage Program has been around for several years and recent changes have allowed borrowers to refinance who owe more than the value of their homes and who also have mortgages backed by the government. In fact, the initiative is thriving. In all of 2011, 60,000 underwater borrowers participated in HAMP. Compare that with 330,000 homeowners during the first ten months of this year. Through the program, borrowers can receive principal reductions, reduced payments, or reduced interest rates.

Now the Obama team is looking to expand the scope of the program to include those whose loans are not secured by Fannie Mae, Freddie Mac, or the Federal Housing Administration. Fannie and Freddie own or guarantee roughly half of all U.S. mortgage loans now, but there are plenty of borrowers whose loans are held by private companies, especially those who went through subprime credit lenders.

While this expansion could help several hundred thousand homeowners out of a tricky situation, saving them as much as $2,600 a year according to the Congressional Budget Office, many view it as risky since it would shift more debt on to taxpayers and off the shoulders of private corporations. Others say the government is not well equipped to take on these troubled loans.

Fannie and Freddie “have already proved that they really weren’t good at pricing higher-risk assets” during the housing bubble, said David Stevens, chief executive of the Mortgage Bankers Association in a Wall Street Journal article . “What gives us the belief they can price it better today?” Allowing the firms to “reload up their balance sheets…will ultimately be a taxpayer expense,” he said.

Making this change to HAMP would require Congressional approval to allow Fannie and Freddie to service non-government backed loans. And the way things are going today, that may be a long shot.


About Amber Nelson
Amber Nelson is a seasoned mortgage industry writer and a regular contributor to and

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