California’s Keep Your Home program, collectively referred to as Cal-HAMP, has grown from receiving $700 million to $2 billion in federal foreclosure aid, which is enough to potentially help over 100,000 homeowners. Under one of the crucial precepts of the program, participating lenders receive one dollar for every dollar of mortgage debt they forgive, a process called a cramdown.

The $2 billion allocated to the program is broken down into different categories of aid:

  • $875 million will provide as much as $3,000 a month for six months to unemployed homeowners so they can continue paying their mortgages;
  • $335 million will provide up to $15,000 to  individual delinquent homeowners to get current on their mortgages or move to a more affordable home; and
  • $790 million will be used to compensate lenders dollar-for-dollar for any principal reductions they grant on underwater mortgages.

To meet borrower eligibility requirements, homeowners:

  • do not need to be a California Housing Finance Agency (CalHFA) borrower;
  • must own and occupy the home as their primary residence;
  • must complete a Hardship Affidavit explaining the reason for hardship, which may include unemployment, income reduction, disability or illness;
  • must demonstrate an ability to sustain modified mortgage payments according to lender guidelines;
  • must be delinquent on their mortgage or demonstrate imminent delinquency; and
  • can qualify by completing a financial hardship statement if their financial hardship is a result of their military service.

To meet property eligibility requirements, the mortgage:

  • must be a first lien loan;
  • cannot exceed $729,750;
  • cannot be secured by a property that is abandoned, vacant, condemned or in serious disrepair;
  • must be secured by a property that is owner-occupied, the borrower’s principal residence and located in California; and
  • must have been originated before  2009.

Borrowers are disqualified if they own another property besides their primary residence being considered for the program.

However, the invitation sent to lenders to participate in the program was either lost in the mail, or the state’s three largest mortgage servicers simply aren’t interested. Wells Fargo and JP Morgan Chase have yet to agree to the state’s proposal. Bank of America (BofA) says it may participate but has not signed a formal agreement. Fannie Mae and Freddie Mac have declined the invitation.

The Keep Your Home program is designed for low- to mid-tier income category households. Keep Your Home was originally scheduled to begin November 1, 2010 but has been pushed back until early 2011.

first tuesday take: The government’s program is intended to reach out to those homeowners in the bleakest of economic predicaments: unemployment,  negative equity, inability to pay and mortgage delinquency. The Keep Your Home program has the theoretical potential of being a formidable lifeboat for those with the greatest need.

But how can a broker or agent get in on the rendering of services in this real estate transaction to make a fee? This is a loan modification program and no front-end fee is permitted. The need for advice on the free services of the Department of Housing and Urban Development (HUD) is a requisite to getting involved with a client if a contingent fee is expected. [For more information regarding modification service rules, see the January 2010 first tuesday legislative watch, Disclosure of free counseling prior to loan modification agreement.]

Further, it contains a devastating Achilles’ heel which most likely will render it near useless – lenders have to agree to participate. Thus, if lenders, wary of their balance sheet solvency issues, choose not to play, distressed homeowners will be left floundering in the cold. [For more information regarding California’s other housing aid initiatives, see the September 2010 first tuesday article, FHA ‘Short-Refi Program’ debt relief for underwater homeowners.]

It comes as no surprise that lenders continue to deny the need for principal reductions in California as by doing so they would need to report their losses and they avoid the small amount of fraud that will inevitably be involved as in any loan arrangement. However, it is particularly unsettling that they are unwilling to work with the state when the Keep Your Home program will be compensating them (federal HAMP funds) for at least a part of the debt they forgive.  HAMP did not work, nor will this Cal-HAMP.

Their lack of interest in the program illustrates the great need for Congress to give judicial authority to bankruptcy judges to force cramdowns since lenders, left to their own choosing, would prefer to kick the problem down the road, delay the reporting of losses and keep their arms obstinately crossed much like petulant children after a deserved scolding. Bankruptcy cramdowns are recovery-based therapy that works, and we need to get this recovery going.  [For more information regarding cramdowns, see the January 2010 first tuesday article, Cramdowns, cramdowns, cramdowns!; for more information regarding the development of Cal-HAMP, see the June 2010 first tuesday article, Cal-HAMP: how $700 million of federal aid is proposed to be allocated in California.]

Re: “California foreclosure aid fund swells, but banks hesitate” from the Los Angeles Times