While some principal reduction on mortgages with government loan modifications can be credited towards the recent mortgage servicer settlement, the vast majority of loans modified under the federal program won’t be eligible.
The Department of Housing and Urban Development says that incentives paid to servicers under the Home Affordable Modification Program cannot be used as credit towards the massive mortgage servicer settlement announced on Feb. 9.
HUD was responding to an article in the Financial Times that, it says, argues HAMP subsidies are being used for credit under the settlement.
“A clause in the provisional agreement — which has not been made public — allows the banks to count future loan modifications made under a 2009 foreclosure-prevention initiative towards their restructuring obligations for the new settlement, according to people familiar with the matter,” the U.K. business publication wrote. “The existing $30bn initiative, the home affordable modification programme, or Hamp, provides taxpayer funds as an incentive to banks, third party investors and troubled borrowers to arrange loan modifications.”
But HUD says that the Financial Times got it wrong.
“In reality there is no such subsidy,” HUD’s public affairs department wrote in its online publication The HUDdle. “Servicers cannot use HAMP incentives to meet their obligations under the settlement, plain and simple.”
HUD explained that more than 95 percent of the 1 million HAMP modifications “done to date” don’t involve principal reduction. HAMPs with payment reduction that don’t include principal reduction don’t get credit towards the settlement.
“For HAMP modifications that do include principal reduction, servicers only receive credit for the portion of the principal reduction that they themselves pay for, not for the portion covered by incentives in the program,” HUD explained. “In other words, if a servicer receives a HAMP incentive of 40 cents for every dollar of principal reduction, it can receive credit at the applicable rate on the remaining 60 cents.”
The housing agency said that the settlement didn’t exempt servicers from HAMP requirements in order to preserve the program’s “extensive compliance regime, reporting requirements, and borrower-protection features.”
HUD explained that it didn’t exempt HAMP loans from the settlement entirely since that would have reduced the incentive for HAMP servicers to grant principal reduction — something the agency called a “perverse outcome.”