How HAMP Refinancing Works

Posted on September 7th, 2010

• Underwater borrowers who are up-to-date are targeted
• The lender(s) and loan servicer(s) must agree
• There are transaction fees and a credit record is adversely affected
• The scheme applies only to primary residences
• A bank may elect to opt out at any time

Assuming that the latest HAMP refinancing initiatives work well they could untangle many of the tricky knots in the system, and do away with strategic defaults as well by troubled homeowners who believe that they are too far underwater. However, there is still a great deal of confusion regarding HAMP refinancing among those traditionally referred to as ordinary Americans, as if there were such a thing. So I thought that I would spell things out again, including how second liens affect refinancing, and other related matters. Here goes.

• Who are the Targeted Beneficiaries of Refinancing in Terms of HAMP?

Borrowers, who are up to date with payments, but owe more than their mortgaged homes are worth. If they meet standard underwriting criteria, then they may receive refinance through Federal Housing Administration loans. This does not apply to existing underwater borrowings from the Federal Housing Administration, because their servicers Fannie Mae and Freddie Mac have chosen to go a different route.

• How does the Loan Refinancing Program Work?

The lender that “owns” the loan and their service provider must first agree to reduce the outstanding balance by at least 10%, and down to a point where it is no more that 97.75% of the property’s current value. The underwater borrower is then required to take out a Federal Housing Administration-backed loan at current interest rates.

• What does this Cost the Borrower?

The borrower pays the transaction fee for the re-financing, and, in the case of a Federal Housing Administration loan is required to pay mortgage insurance too. A more serious cost is often the longer-term damage to their credit record caused by forgiveness of a portion of their debt.

• Can I do the Same in the Case of an Investment Property or Second Home?

No, a borrower must live in the property to qualify. If you have taken a second mortgage, the second lender must agree, and the lenders must be in agreement between themselves regarding forgiveness of the over-market value principal.

• Where to From Here?

Speak to your loan servicer – the company that administers your loan. You will need to convince them of the merits of your case, because the final decision rests with them. Remember, the program is voluntary, which means that they may refuse your request, and any second lender must voluntarily agree to.

This particular HAMP component also known as the short refinance initiative applies only to borrowers who are underwater but up to date with payments. Other alternatives do exist – discuss these at a local Housing Office, or with a bank. This information courtesy of www.foreclosuredatabank.com, who list foreclosed property nationwide.

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