Preserving Homeownership: Foreclosure
Prevention Initiatives

Katie Jones
Analyst in Housing Policy
January 12, 2012
Congressional Research Service
7-5700
www.crs.gov
R40210
CRS Report for Congress
Pr
epared for Members and Committees of Congress

Preserving Homeownership: Foreclosure Prevention Initiatives

Summary
The foreclosure rate in the United States began to rise rapidly beginning around the middle of
2006. Losing a home to foreclosure can hurt homeowners in many ways; for example,
homeowners who have been through a foreclosure may have difficulty finding a new place to live
or obtaining a loan in the future. Furthermore, concentrated foreclosures can drag down nearby
home prices, and large numbers of abandoned properties can negatively affect communities.
Finally, the increase in foreclosures may destabilize the housing market, which could in turn
negatively impact the economy as a whole.
There is a broad consensus that there are many negative consequences associated with rising
foreclosure rates. Both Congress and the Bush and Obama Administrations have initiated efforts
aimed at preventing further increases in foreclosures and helping more families preserve
homeownership. These efforts currently include the Making Home Affordable program, which
includes both the Home Affordable Refinance Program (HARP) and the Home Affordable
Modification Program (HAMP); the Hardest Hit Fund; the Federal Housing Administration
(FHA) Short Refinance Program; and the National Foreclosure Mitigation Counseling Program
(NFMCP), which provides funding for foreclosure mitigation counseling and is administered by
NeighborWorks America. Two other initiatives, Hope for Homeowners and the Emergency
Homeowners Loan Program (EHLP), expired at the end of FY2011. Several states and localities
have also initiated their own foreclosure prevention efforts, as have private companies. A
voluntary alliance of mortgage lenders, servicers, investors, and housing counselors has also
formed the HOPE NOW Alliance to reach out to troubled borrowers.
In March 2011, the House of Representatives passed a series of bills that, if enacted, would
terminate the Home Affordable Modification Program (H.R. 839), the FHA Short Refinance
Program (H.R. 830), and the Emergency Homeowners Loan Program (H.R. 836), as well as the
Neighborhood Stabilization Program (H.R. 861), which is not a foreclosure prevention program
but is intended to address the effects of foreclosures on communities.
While many observers agree that slowing the pace of foreclosures is an important policy goal,
there are several challenges associated with foreclosure prevention plans. These challenges
include implementation issues, such as deciding who has the authority to make mortgage
modifications, developing the capacity to complete widespread modifications, and assessing the
possibility that homeowners with modified loans will default again in the future. Other challenges
are related to the perception of unfairness, the problem of inadvertently providing incentives for
borrowers to default, and the possibility of setting an unwanted precedent for future mortgage
lending.
This report describes the consequences of foreclosure on homeowners; outlines recent foreclosure
prevention initiatives, largely focusing on initiatives implemented by the federal government; and
discusses the challenges associated with foreclosure prevention.

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Preserving Homeownership: Foreclosure Prevention Initiatives

Contents
Introduction and Background .......................................................................................................... 1
Recent Market Trends................................................................................................................ 1
Impacts of Foreclosure .............................................................................................................. 3
The Policy Problem ................................................................................................................... 4
Why Might a Household Find Itself Facing Foreclosure?......................................................... 5
Changes in Household Circumstances ................................................................................ 5
Mortgage Features............................................................................................................... 6
Adjustable-Rate Mortgages........................................................................................... 6
Zero-Downpayment or Low-Downpayment Loans ...................................................... 7
Interest-Only Loans and Negative Amortization Loans................................................ 7
Alt-A Loans................................................................................................................... 7
Types of Loan Workouts............................................................................................................ 8
Repayment Plans........................................................................................................... 8
Principal Forbearance ................................................................................................... 8
Principal Write-Downs/Principal Forgiveness.............................................................. 9
Interest Rate Reductions ............................................................................................... 9
Extended Loan Term/Extended Amortization............................................................... 9
Current Foreclosure Prevention Initiatives ...................................................................................... 9
Home Affordable Refinance Program (HARP)....................................................................... 10
Changes to HARP Announced in October 2011................................................................ 11
HARP Results to Date....................................................................................................... 11
Home Affordable Modification Program (HAMP) ................................................................. 12
HAMP Funding ................................................................................................................. 13
HAMP Results to Date...................................................................................................... 13
Conversion of Trial Modifications to Permanent Status ............................................. 16
Servicer Performance ........................................................................................................ 16
Additional HAMP Components and Program Changes .................................................... 17
Second Lien Modification Program (2MP)................................................................. 17
Home Affordable Foreclosure Alternatives Program (HAFA).................................... 18
Home Price Decline Protection................................................................................... 18
Home Affordable Unemployment Program (UP) ....................................................... 18
Principal Reduction Alternative (PRA)....................................................................... 19
Additional Changes..................................................................................................... 20
Hardest Hit Fund ..................................................................................................................... 21
FHA Short Refinance Program................................................................................................ 23
Recently Ended Federal Foreclosure Prevention Initiatives .......................................................... 24
Emergency Homeowners Loan Program................................................................................. 24
Hope for Homeowners ............................................................................................................ 27
Other Existing Government Initiatives .......................................................................................... 29
Foreclosure Counseling Funding to NeighborWorks America................................................ 29
Foreclosure Mitigation Efforts Targeted to Servicemembers .................................................. 30
State and Local Initiatives ....................................................................................................... 31
Private Initiatives ........................................................................................................................... 31
Other Foreclosure Prevention Proposals........................................................................................ 32
Changing Bankruptcy Law...................................................................................................... 32
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Foreclosure Moratorium.......................................................................................................... 33
Issues and Challenges Associated with Preventing Foreclosures .................................................. 33
Who Has the Authority to Modify Mortgages? ....................................................................... 33
Volume of Delinquencies and Foreclosures ............................................................................ 34
Servicer Incentives .................................................................................................................. 34
Possibility of Re-default .......................................................................................................... 35
Distorting Borrower Incentives ............................................................................................... 36
Fairness Issues ......................................................................................................................... 36
Precedent ................................................................................................................................. 37

Figures
Figure 1. Percentage of Loans in Foreclosure by Type of Loan ...................................................... 3
Figure 2. Total Active HAMP Modifications by Month ................................................................ 14
Figure 3. New Trial and Permanent HAMP Modifications by Month........................................... 15

Tables
Table 1. Hardest Hit Fund Allocations to States ............................................................................ 22
Table 2. Emergency Homeowners Loan Program Allocations to States........................................ 26
Table 3. Funding for the National Foreclosure Mitigation Counseling Program .......................... 30
Table A-1. Comparison of Select Federal Foreclosure Prevention Programs................................ 38

Appendixes
Appendix A. Comparison of Recent Federal Foreclosure Prevention Initiatives .......................... 38
Appendix B. Earlier Foreclosure Prevention Programs................................................................. 46

Contacts
Author Contact Information ...................................................................................................... 50

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Introduction and Background
The foreclosure rate in the United States has been rising rapidly since around the middle of 2006.
The large increase in home foreclosures since that time has negatively impacted individual
households, local communities, and the economy as a whole. Consequently, an issue before
Congress is whether to use federal resources and authority to help prevent further increases in
home foreclosures and, if so, how to best accomplish this objective. This report details the impact
of foreclosure on homeowners. It also describes recent attempts to preserve homeownership that
have been implemented by the government and private lenders, and briefly outlines current
proposals for further foreclosure prevention activities. It concludes with a discussion of some of
the challenges inherent in designing foreclosure prevention initiatives.
Foreclosure refers to formal legal proceedings initiated by a mortgage lender against a
homeowner after the homeowner has missed a certain number of payments on his or her
mortgage.1 When a foreclosure is completed, the homeowner loses his or her home, which is
either repossessed by the lender or sold at auction to repay the outstanding debt. In general, the
term “foreclosure” can refer to the foreclosure process or the completion of a foreclosure. This
report deals primarily with preventing foreclosure completions.
In order for the foreclosure process to begin, two things must happen: a homeowner must fail to
make a certain number of payments on his or her mortgage, and a lender must decide to initiate
foreclosure proceedings rather than pursue other options (such as offering a repayment plan or a
loan modification). A borrower that misses one or more payments is usually referred to as being
delinquent on a loan; when a borrower has missed three or more payments, he or she is generally
considered to be in default. Lenders can choose to begin foreclosure proceedings after a
homeowner defaults on his or her mortgage, although lenders vary in how quickly they begin
foreclosure proceedings after a borrower goes into default. Furthermore, the rules governing
foreclosures, and the length of time the process takes, vary by state.
Recent Market Trends
Home prices rose rapidly throughout some regions of the United States beginning in 2001.
Housing has traditionally been seen as a safe investment that can offer an opportunity for high
returns, and rapidly rising home prices reinforced this view. During this housing “boom,” many
people decided to buy homes or take out second mortgages in order to access their increasing
home equity. Furthermore, rising home prices and low interest rates contributed to a sharp
increase in people refinancing their mortgages; for example, between 2000 and 2003, the number
of refinanced mortgage loans jumped from 2.5 million to over 15 million.2 Around the same time,
subprime lending, which generally refers to making mortgage loans to individuals with credit
scores that are too low to qualify for prime rate mortgages, also began to increase, reaching a
peak between 2004 and 2006. However, beginning in 2006 and 2007, home sales started to

1 For a more detailed discussion of the foreclosure process and the factors that contribute to a lender’s decision to
pursue foreclosure, see CRS Report RL34232, The Process, Data, and Costs of Mortgage Foreclosure, coordinated by
Darryl E. Getter.
2 U.S. Department of Housing and Urban Development, Office of Policy Development and Research, An Analysis of
Mortgage Refinancing, 2001-2003
, November 2004, p.1, http://www.huduser.org/Publications/pdf/
MortgageRefinance03.pdf.
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decline, home prices stopped rising and began to fall in many regions, and the rates of
homeowners becoming delinquent on their mortgages or going into foreclosure began to increase.
The percentage of home loans in the foreclosure process in the U.S. began to rise rapidly
beginning around the middle of 2006. Although not all homes in the foreclosure process will end
in a foreclosure completion, an increase in the number of loans in the foreclosure process is
generally accompanied by an increase in the number of homes on which a foreclosure is
completed. According to the Mortgage Bankers Association, an industry group, about 1% of all
home loans were in the foreclosure process in the second quarter of 2006. By the fourth quarter of
2009, the rate had more than quadrupled to over 4.5%. In the third quarter of 2011, the rate of
loans in the foreclosure process was about 4%
The foreclosure rate for subprime loans has always been higher than the foreclosure rate for
prime loans. For example, in the second quarter of 2006, just over 3.5% of subprime loans were
in the foreclosure process compared to less than 0.5% of prime loans. However, both prime and
subprime loans have seen increases in foreclosure rates over the past several years. Like the
foreclosure rate for all loans combined, the foreclosure rates for prime and subprime loans both
more than quadrupled since 2006, with the rate of subprime loans in the foreclosure process
increasing to over 15.5% in the fourth quarter of 2009 and the rate of prime loans in the
foreclosure process increasing to more than 3% over the same time period. As of the third quarter
of 2011, the rate of prime loans in the foreclosure process was about 3%, while the rate of
subprime loans in the foreclosure process was nearly 15%.
Figure 1 illustrates the trend in the rate of mortgages in the foreclosure process over the past
several years. According to the Congressional Oversight Panel, many observers, including the
Federal Reserve, expect high numbers of foreclosures to continue through at least 2012.3
In addition to mortgages that were in the foreclosure process, an additional 3.5% of mortgages
were 90 or more days delinquent but not yet in foreclosure in the third quarter of 2011. These are
mortgages that are in default and generally could be in the foreclosure process, but for one reason
or another the mortgage servicer has not started the foreclosure process yet. Such reasons could
include the volume of delinquent loans that the servicer is dealing with, delays due to efforts to
modify the mortgage before beginning foreclosure, or voluntary foreclosure moratoria put in
place by the servicer. Considering mortgages that are 90 or more days delinquent, as well as
mortgages that are actively in the foreclosure process, may give a more complete picture of the
number of mortgages that are in danger of foreclosure.


3 Congressional Oversight Panel, December Oversight Report: A Review of Treasury’s Foreclosure Prevention
Programs
, December 14, 2010, page 10, available at http://cop.senate.gov/documents/cop-121410-report.pdf.
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Figure 1. Percentage of Loans in Foreclosure by Type of Loan
Q1 2001 – Q3 2011
18.00
16.00
14.00
12.00
e
ag
10.00
rcent
8.00
Pe
6.00
4.00
2.00
0.00
01
2
3
05 05
06
08
09 09
10
20
00
00
006
007
011
_2
_2
2
2007 2
2008
2010
2
Q1_ Q3_2001
Q1 Q3_2002
Q1_2003
Q3 Q1_2004
Q3_2004
Q1 20Q3 20Q1 Q3 20Q1 Q3 Q1 20Q3 Q1 20Q3 20Q1 Q3 20Q1 2011
Q3
Time
All Loans
Prime
Subprime

Source: Figure created by CRS using data from the Mortgage Bankers Association.
Notes: The Mortgage Bankers Association (MBA) is one of several organizations that reports delinquency and
foreclosure data, but it does not represent all mortgages. MBA estimates that its data cover about 80% of
outstanding first-lien mortgages on single-family properties.
Impacts of Foreclosure
Losing a home to foreclosure can have a number of negative effects on a household. For many
families, losing a home can mean losing the household’s largest store of wealth. Furthermore,
foreclosure can negatively impact a borrower’s creditworthiness, making it more difficult for him
or her to buy a home in the future. Finally, losing a home to foreclosure can also mean that a
household loses many of the less tangible benefits of owning a home. Research has shown that
these benefits might include increased civic engagement that results from having a stake in the
community, and better health, school, and behavioral outcomes for children.4
Some homeowners might have difficulty finding a place to live after losing their home to
foreclosure. Many will become renters. However, some landlords may be unwilling to rent to

4 For example, see Donald R. Haurin, Toby L. Parcel, and R. Jean Haurin, The Impact of Homeownership on Child
Outcomes
, Joint Center for Housing Studies, Harvard University, Low-Income Homeownership Working Paper Series,
October 2001, http://www.jchs.harvard.edu/publications/homeownership/liho01-14.pdf, and Denise DiPasquale and
Edward L. Glaeser, Incentives and Social Capital: Are Homeowners Better Citizens?, National Bureau of Economic
Research, NBER Working Paper 6363, Cambridge, MA, January 1998, http://www.nber.org/papers/w6363.pdf?
new_window=1.
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families whose credit has been damaged by a foreclosure, limiting the options open to these
families. There can also be spillover effects from foreclosure on current renters. Renters living in
units facing foreclosure may be required to move, even if they are current on their rent payments.
As more homeowners become renters and as more current renters are displaced when their
landlords face foreclosure, pressure on local rental markets may increase, and more families may
have difficulty finding affordable rental housing. Some observers have also raised the concern
that a large increase in foreclosures could increase homelessness, either because families who lost
their homes have trouble finding new places to live or because the increased demand for rental
housing makes it more difficult for families to find adequate, affordable units.
If foreclosures are concentrated, they can also have negative impacts on communities. Many
foreclosures in a single neighborhood may depress surrounding home values.5 If foreclosed
homes stand vacant for long periods of time, they can attract crime and blight, especially if they
are not well-maintained. Concentrated foreclosures also place pressure on local governments,
which can lose property tax revenue and may have to step in to maintain vacant foreclosed
properties.
The Policy Problem
There is a broad bipartisan consensus that the recent rapid rise in foreclosures is having negative
consequences on households and communities. For example, Representative Spencer Bachus,
chairman of the House Committee on Financial Services, has said that “[i]t is in everyone’s best
interest as a general rule to prevent foreclosures. Foreclosures have a negative impact not only on
families but also on their neighbors, their property value, and on the community and local
government.”6 Former Senator Chris Dodd, during his tenure as chairman of the Senate
Committee on Banking, Housing, and Urban Affairs, described an “overwhelming tide of
foreclosures ravaging our neighborhoods and forcing thousands of American families from their
homes.”7
There is less agreement among policymakers about how much the federal government should do
to prevent foreclosures. Proponents of enacting government policies and using government
resources to prevent foreclosures argue that, in addition to being a compassionate response to the
plight of individual homeowners, such action may prevent further damage to home values and
communities that can be caused by concentrated foreclosures. Supporters also suggest that
preventing foreclosures may help stabilize the economy as a whole. Opponents of government
foreclosure prevention programs argue that foreclosure prevention should be worked out between
lenders and borrowers without government interference. Opponents also express concern that
people who do not really need help, or who are not perceived to deserve help, will unfairly take
advantage of government foreclosure prevention programs. They argue that taxpayers’ money

5 For a review of the literature on the impact of foreclosures on nearby house prices, see Kai-yan Lee, Foreclosure’s
Price-Depressing Spillover Effects on Local Properties: A Literature Review
, Federal Reserve Bank of Boston,
Community Affairs Discussion Paper, No. 2008-01, September 2008, http://www.bos.frb.org/commdev/pcadp/2008/
pcadp0801.pdf.
6 Representative Spencer Bachus, “Remarks of Ranking Member Spencer Bachus During Full Committee Hearing on
Loan Modifications,” press release, November 12, 2008, http://bachus.house.gov/index.php?option=com_content&
task=view&id=160&Itemid=104.
7 Senator Chris Dodd, “Dodd Statement on Government Loan Modification Program,” statement, November 11, 2008,
http://dodd.senate.gov/?q=node/4620.
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should not be used to help people who can still afford their loans but want to get more favorable
terms, people who may be seeking to pass their losses on to the lender or the taxpayer, or people
who knowingly took on mortgages that they could not afford.
Despite the concerns surrounding foreclosure prevention programs, and disagreement over the
proper role of the government in preserving homeownership, Congress and the executive branch
have both recently taken actions aimed at preventing foreclosures. Many private companies and
state and local governments have also undertaken their own foreclosure prevention efforts. This
report describes why so many households are currently at risk of foreclosure, outlines recent
initiatives to help homeowners remain in their homes, and discusses some of the challenges
inherent in designing successful foreclosure prevention plans.
Why Might a Household Find Itself Facing Foreclosure?
There are many reasons that a household might fall behind on its mortgage payments. Some
borrowers may have simply taken out loans on homes that they could not afford. However, many
homeowners who believed they were acting responsibly when they took out a mortgage
nonetheless find themselves facing foreclosure. The reasons households might have difficulty
making their mortgage payments include changes in personal circumstances, which can be
exacerbated by macroeconomic conditions, and features of the mortgages themselves.
Changes in Household Circumstances
Changes in a household’s circumstances can affect its ability to pay its mortgage. For example, a
number of events can leave a household with a lower income than it anticipated when it bought
its home. Such changes in circumstances can include a lost job, an illness, or a change in family
structure due to divorce or death. Families that expected to maintain a certain level of income
may struggle to make payments if a household member loses a job or faces a cut in pay, or if a
two-earner household becomes a single-earner household. Unexpected medical bills or other
unforeseen expenses can also make it difficult for a family to stay current on its mortgage.
Furthermore, sometimes a change in circumstances means that a home no longer meets a family’s
needs, and the household needs to sell the home. These changes can include having to relocate for
a job or needing a bigger house to accommodate a new child or an aging parent. Traditionally,
households that needed to move could usually sell their existing homes. However, the recent
decline in home prices in many communities nationwide has left some homeowners
“underwater,” meaning that borrowers owe more on their homes than the houses are worth. This
limits homeowners’ ability to sell their homes if they have to move; many of these families are
effectively trapped in their current homes and mortgages because they cannot afford to sell their
homes at a loss.
The risks presented by changing personal circumstances have always existed for anyone who
took out a loan, but deteriorating macroeconomic conditions, such as falling home prices and
increasing unemployment, have made families especially vulnerable to losing their homes for
such reasons. The fall in home values that has left some homeowners owing more than the value
of their homes not only traps those people in their current homes; it also makes it difficult for
homeowners to sell their homes in order to avoid a foreclosure, and it increases the incentive for
homeowners to walk away from their homes if they can no longer afford their mortgage
payments. Along with the fall in home values, another recent macroeconomic trend has been high
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unemployment. More households experiencing job loss and the resultant income loss have made
it difficult for many families to keep up with their monthly mortgage payments.
Mortgage Features
Borrowers might also find themselves having difficulty staying current on their loan payments
due in part to features of their mortgages. In previous years, there had been an increase in the use
of alternative mortgage products whose terms differ significantly from the traditional 30-year,
fixed interest rate mortgage model.8 While borrowers with traditional mortgages are not immune
to delinquency and foreclosure, many of these alternative mortgage features seem to have
increased the risk that a homeowner will have trouble staying current on his or her mortgage.
Many of these loans were structured to have low monthly payments in the early stages and then
adjust to higher monthly payments depending on prevailing market interest rates and/or the length
of time the borrower held the mortgage. Furthermore, many of these mortgage features made it
more difficult for homeowners to quickly build equity in their homes. Some examples of the
features of these alternative mortgage products are listed below.
Adjustable-Rate Mortgages
With an adjustable-rate mortgage (ARM), a borrower’s interest rate can change at predetermined
intervals, often based on changes in an index. The new interest rate can be higher or lower than
the initial interest rate, and monthly payments can also be higher or lower based on both the new
interest rate and any interest rate or payment caps.9 Some ARMs also include an initial low
interest rate known as a teaser rate. After the initial low-interest period ends and the new interest
rate kicks in, the monthly payments that the borrower must make may increase, possibly by a
significant amount.
Adjustable-rate mortgages make economic sense for some borrowers, especially if interest rates
are expected to go down in the future. ARMs can help people own a home sooner than they may
have been able to otherwise, or make sense for borrowers who cannot afford a high loan payment
in the present but expect a significant increase in income in the future that would allow them to
afford higher monthly payments. Furthermore, the interest rate on ARMs tends to follow short-
term interest rates in the economy; if the gap between short-term and long-term rates gets very
wide, it might make sense for borrowers to choose an ARM even if they expect interest rates to
rise in the future. Finally, in markets with rising property values, borrowers with ARMs may be
able to refinance their mortgages to avoid higher interest rates or large increases in monthly
payments. However, if home prices fall, refinancing the mortgage or selling the home to pay off
the debt may not be feasible, and homeowners can find themselves stuck with higher mortgage
payments.

8 For a fuller discussion of these types of mortgage products and their effects, see CRS Report RL33775, Alternative
Mortgages: Causes and Policy Implications of Troubled Mortgage Resets in the Subprime and Alt-A Markets
, by
Edward V. Murphy.
9 Even if the interest rate remains the same or decreases, it is possible for monthly payments to increase if prior
payments were subject to an interest rate cap or a payment cap. This is because unpaid interest that would have accrued
if not for the cap can be added to the principal loan amount, resulting in negative amortization. For more information
on the many variations of adjustable rate mortgages, see The Federal Reserve Board, Consumer Handbook on
Adjustable Rate Mortgages
, http://www.federalreserve.gov/pubs/arms/arms_english.htm#drop.
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Zero-Downpayment or Low-Downpayment Loans
As the name suggests, zero-downpayment and low-downpayment loans require either no
downpayment or a significantly lower downpayment than has traditionally been required. These
types of loans make it easier for homebuyers who do not have a lot of cash up-front to purchase a
home. This type of loan may be especially useful in areas where home prices are rising more
rapidly than income, because it allows borrowers without enough cash for a large downpayment
to enter markets they could not otherwise afford. However, a low- or no-downpayment loan also
means that families have little or no equity in their homes in the early phases of the mortgage,
making it difficult to sell the home or refinance the mortgage in response to a change in
circumstances if home prices decline. Such loans may also mean that a homeowner takes out a
larger mortgage than he or she would otherwise.
Interest-Only Loans and Negative Amortization Loans
With an interest-only loan, borrowers pay only the interest on a mortgage—but no part of the
principal—for a set period of time. This option increases the homeowner’s monthly payments in
the future, after the interest-only period ends and the principal amortizes. These types of loans
limit a household’s ability to build equity in its home, making it difficult to sell or refinance the
home in response to a change in circumstances if home prices are declining.
With a negative amortization loan, borrowers have the option to pay less than the full amount of
the interest due for a set period of time. The loan “negatively amortizes” as the remaining interest
is added to the outstanding loan balance. Like interest-only loans, this option increases future
monthly mortgage payments when the principal and the balance of the interest amortizes. These
types of loans can be useful in markets where property values are rising rapidly, because
borrowers can enter the market and then use the equity gained from rising home prices to
refinance into loans with better terms before payments increase. They can also make sense for
borrowers who currently have low incomes but expect a significant increase in income in the
future. However, when home prices stagnate or fall, interest-only loans and negative amortization
loans can leave borrowers with negative equity, making it difficult to refinance or sell the home to
pay the mortgage debt.
Alt-A Loans
Alt-A loans are mortgages that are similar to prime loans, but for one or more reasons do not
qualify for prime interest rates. One example of an Alt-A loan is a low-documentation or no-
documentation loan. These are loans to borrowers with good credit scores but little or no income
or asset documentation. Although no-documentation loans allow for more fraudulent activity on
the part of both borrowers and lenders, they may be useful for borrowers with income that is
difficult to document, such as those who are self-employed or work on commission. Other
examples of Alt-A loans are loans with high loan-to-value ratios or loans to borrowers with credit
scores that are too low for a prime loan but high enough to avoid a subprime loan. In all of these
cases, the borrower is charged a higher interest rate than he or she would be charged with a prime
loan.
Many of these loan features may have played a role in the recent increase in foreclosure rates.
Some homeowners were current on their mortgages before their monthly payments increased due
to interest rate resets or the end of option periods. Some built up little equity in their homes
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because they were not paying down the principal balance of their loan or because they had not
made a downpayment. Stagnant or falling home prices in many regions also hampered borrowers’
ability to build equity in their homes. Borrowers without sufficient equity find it difficult to take
advantage of options such as refinancing into a more traditional mortgage if monthly payments
become too high or selling the home if their personal circumstances change.
Types of Loan Workouts
When a household falls behind on its mortgage, there are options that lenders or servicers10 may
be able to employ as an alternative to beginning foreclosure proceedings. Some of these options,
such as a short sale and a deed-in-lieu of foreclosure,11 allow a homeowner to avoid the
foreclosure process but still result in a household losing its home. This section describes methods
of avoiding foreclosure that allow homeowners to keep their homes; these options generally take
the form of repayment plans or loan modifications.
Repayment Plans
A repayment plan allows a delinquent borrower to become up-to-date on his or her loan by paying
back the payments he or she has missed, along with any accrued late fees. This is different from a
loan modification, which changes one or more of the terms of the loan (such as the interest rate).
Under a repayment plan, the missed payments and late fees may be paid back after the rest of the
loan is paid off, or they may be added to the existing monthly payments. The first option
increases the time that it will take for a borrower to pay back the loan, but his or her monthly
payments will remain the same. The second option may result in an increase in monthly
payments. Repayment plans may be a good option for homeowners who experienced a temporary
loss of income but are now financially stable. However, since they do not generally make
payments more affordable, repayment plans are unlikely to help homeowners with unaffordable
loans avoid foreclosure in the long term.
Principal Forbearance
Principal forbearance means that a lender or servicer removes part of the principal from the
portion of the loan balance that is subject to interest, thereby lowering borrowers’ monthly
payments by reducing the amount of interest owed. The portion of the principal that is subject to
forbearance still needs to be repaid by the borrower in full, usually after the interest-bearing part

10 Mortgage lenders are the organizations that make mortgage loans to individuals. Often, the mortgage is managed by
a company known as a servicer; servicers usually have the most contact with the borrower, and are responsible for
actions such as collecting mortgage payments, initiating foreclosures, and communicating with troubled borrowers. The
servicer can be an affiliate of the original mortgage lender or can be a separate company. Many mortgages are
repackaged into mortgage-backed securities (MBS) that are sold to institutional investors. Servicers are usually subject
to contracts with mortgage lenders and MBS investors that may limit their ability to undertake loan workouts or
modifications; the scope of such contracts and the obligations that servicers must meet vary widely.
11 In a short sale, a household sells its home for less than the amount it owes on its mortgage, and the lender generally
accepts the proceeds from the sale as payment in full on the mortgage even though it is taking a loss. A deed-in-lieu of
foreclosure refers to the practice of a borrower turning the deed to the house over to the lender, which accepts the deed
as payment of the mortgage debt. However, in some cases, the borrower may still be liable for the remaining
outstanding mortgage debt when a short sale or a deed-in-lieu is utilized.
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Preserving Homeownership: Foreclosure Prevention Initiatives

of the loan is paid off or when the home is sold. Because principal forbearance does not actually
change any of the loan terms, it resembles a repayment plan more than a loan modification.
Principal Write-Downs/Principal Forgiveness
A principal write-down is a type of mortgage modification that lowers borrowers’ monthly
payments by forgiving a portion of the loan’s principal balance. The forgiven portion of the
principal never needs to be repaid. Because the borrower now owes less, his or her monthly
payment will be smaller. This option is costly for lenders but can help borrowers achieve
affordable monthly payments, as well as increase the equity that borrowers have in their homes
and therefore increase their desire to stay current on the mortgage and avoid foreclosure.12
Interest Rate Reductions
Another form of loan modification is when the lender voluntarily lowers the interest rate on a
mortgage. This is different from a refinance, in which a borrower takes out a new mortgage with a
lower interest rate and uses the proceeds from the new loan to pay off the old loan. Unlike
refinancing, a borrower does not have to pay closing costs or qualify for a new loan to get an
interest rate reduction, which can make interest rate reductions a good option for borrowers who
owe more on their mortgages than their homes are worth. With an interest rate reduction, the
interest rate can be reduced permanently, or it can be reduced for a period of time before
increasing again to a certain fixed point. Lenders can also freeze interest rates at their current
level in order to avoid impending interest rate resets on adjustable rate mortgages. Interest rate
modifications are relatively costly to the lender, but they can be effective at reducing monthly
payments to an affordable level.
Extended Loan Term/Extended Amortization
Another option for lowering monthly mortgage payments is extending the amount of time over
which the loan is paid back. While extending the loan term increases the total cost of the
mortgage for the borrower because more interest will accrue, it allows monthly payments to be
smaller because they are paid over a longer period of time. Most mortgages in the U.S. have an
initial loan term of 25 or 30 years; extending the loan term from 30 to 40 years, for example,
could result in a lower monthly mortgage payment for the borrower.
Current Foreclosure Prevention Initiatives
The federal government, state and local governments, and private companies have all
implemented a variety of plans to attempt to slow the recent increase in foreclosures. This section
describes a number of recent foreclosure prevention initiatives, focusing on those implemented by
the federal government.

12 Historically, one impediment to principal forgiveness has been that borrowers were required to claim the forgiven
amount as income, and therefore had to pay taxes on that income. Congress recently passed legislation that excludes
mortgage debt forgiven before January 1, 2013, from taxable income. For more information about the tax treatment of
principal forgiveness, see CRS Report RL34212, Analysis of the Tax Exclusion for Canceled Mortgage Debt Income,
by Mark P. Keightley and Erika K. Lunder.
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Home Affordable Refinance Program (HARP)
On February 18, 2009, President Obama announced the Making Home Affordable (MHA)
program, aimed at helping homeowners who are having difficulty making their mortgage
payments avoid foreclosure.13 (The program details originally referred to the program as the
Homeowner Affordability and Stability Plan, or HASP. Further program details released on
March 4, 2009, began referring to the plan as Making Home Affordable.) Making Home
Affordable is part of the Administration’s broader economic recovery strategy, along with the
Financial Stability Plan (an administrative initiative aimed at shoring up the financial system) and
the American Recovery and Reinvestment Act of 2009 (enacted legislation (P.L. 111-5) aimed at
stimulating the economy.14
Making Home Affordable includes three main parts. The first two parts of the plan allow certain
homeowners to refinance or modify their mortgages, and each of those pieces are described
below. The third part of the plan, which provided additional financial support to Fannie Mae and
Freddie Mac, is not discussed in detail in this report.15
The refinancing piece of MHA is the Home Affordable Refinance Program (HARP). HARP
allows homeowners with mortgages owned or guaranteed by Fannie Mae or Freddie Mac16 to
refinance into loans with more favorable terms even if they owe more than 80% of the value of
their homes. Generally, borrowers who owe more than 80% of the value of their homes have
difficulty refinancing and therefore cannot take advantage of lower interest rates. By allowing
borrowers who owe more than 80% of the value of their homes to refinance their mortgages, the
plan is meant to help qualified borrowers lower their monthly mortgage payments to a level that
is more affordable. Originally, qualified borrowers were eligible to refinance under this program
if they owed up to 105% of the value of their homes. On July 1, 2009, the Administration
announced that it would expand the program to include borrowers who owe up to 125% of the
value of their homes. In October 2011, the Federal Housing Finance Agency (FHFA), Fannie’s
and Freddie’s conservator, announced that it would remove the loan-to-value ratio cap entirely.
In addition to having a mortgage owned or guaranteed by Fannie Mae or Freddie Mac,17 a
borrower must have a mortgage on a single-family home, live in the home as his or her primary

13 More information on the Administration’s housing plan can be found at http://www.treasury.gov/initiatives/financial-
stability/programs/housing-programs/Pages/default.aspx.
14 For more information on the Financial Stability Plan, see http://www.financialstability.gov/docs/fact-sheet.pdf. For
more information on the American Recovery and Reinvestment Act of 2009, see CRS Report R40537, American
Recovery and Reinvestment Act of 2009 (P.L. 111-5): Summary and Legislative History
, by Clinton T. Brass et al.
15 The third piece of the Administration’s housing plan provided additional financial support for Fannie Mae and
Freddie Mac in an effort to maintain low mortgage interest rates. The Department of the Treasury said that it would
increase its Preferred Stock Purchase agreements from $100 billion to $200 billion for both Fannie Mae and Freddie
Mac, and would increase the size of their portfolios by $50 billion each. The funding for the increased preferred stock
purchases was authorized by the Housing and Economic Recovery Act of 2008 (P.L. 110-289).
16 Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that were chartered by Congress to
provide liquidity to the mortgage market. Rather than make loans directly, the GSEs buy loans made in the private
market and either hold them in their own portfolios or securitize and sell them to investors. The GSEs were put under
the conservatorship of FHFA on September 7, 2008. For more information on the GSEs in general, see CRS Report
RL33756, Fannie Mae and Freddie Mac: A Legal and Policy Overview, by N. Eric Weiss and Michael V. Seitzinger,
and for more information on the conservatorship, see CRS Report RS22950, Fannie Mae and Freddie Mac in
Conservatorship
, by Mark Jickling.
17 Borrowers can look up whether their loan is owned by Fannie Mae or Freddie Mac at
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residence, and be current on the mortgage payments in order to be eligible for this program.
Rather than targeting homeowners who are behind on their mortgage payments, this piece of the
MHA plan targets homeowners who have kept up with their payments but have lost equity in their
homes due to falling home prices. HARP is scheduled to end on December 31, 2013.18
Changes to HARP Announced in October 2011
In October 2011, the Federal Housing Finance Agency (FHFA) announced a number of changes
to HARP designed to allow more people to qualify for the program. 19 As discussed earlier, one of
these changes removed the cap on the loan-to-value ratio, which had previously limited eligibility
for the program to those with loan-to-value ratios up to 125%. Another change is that Fannie Mae
and Freddie Mac have eliminated or reduced certain fees that are paid by borrowers who
refinance through HARP. Fannie and Freddie will also waive certain representations and
warranties made by lenders on the original loans, which may make lenders more likely to
participate in HARP by releasing them from some responsibility for any defects in the original
loan. The changes also encourage greater use of automated valuation models instead of property
appraisals in order to streamline the refinancing process. Finally, as part of these HARP changes,
FHFA extended the end date for the program to December 31, 2013.
Fannie Mae and Freddie Mac have each released their own guidance governing how the HARP
changes will be implemented for loans that they own or guarantee.20 Many of these changes
became effective in December 2011 or January 2012; however, specific changes go into effect on
different dates, and the effective dates can vary between Fannie Mae and Freddie Mac. Individual
lenders might also vary in when they implement the program changes, or, since HARP is not
mandatory, whether they adopt all of the changes allowed by FHFA.
HARP Results to Date
The Administration originally estimated that HARP could help up to between 4 million and 5
million homeowners. According to a recent report from the Federal Housing Finance Agency
(FHFA), Fannie Mae and Freddie Mac had refinanced over 962,000 loans with loan-to-value
ratios above 80% through October 2011.21 The majority of these mortgages (over 879,000) had

(...continued)
http://makinghomeaffordable.gov/loan_lookup.html.
18 HARP was originally scheduled to expire on June 10, 2010. The Federal Housing Finance Agency has extended the
program three times. In March 2010, FHFA announced that it was extending the program until June 30, 2011. In March
2011, FHFA announced that it was extending the program by another year, until June 30, 2012. In October 2011,
FHFA announced that it would extend the program until December 31, 2013. See the following Federal Housing
Finance Agency press releases: “FHFA Extends Refinance Program by One Year,” March 1, 2010, http://fhfa.gov/
webfiles/15466/HARPEXTENDED3110%5b1%5d.pdf; “FHFA Extends Refinance Program by One Year,” March 11,
2011, http://fhfa.gov/webfiles/20399/HarpExtended0311R.pdf; and “FHFA, Fannie Mae and Freddie Mac Announce
HARP Changes to Reach More Borrowers,” October 24, 2011, http://fhfa.gov/webfiles/22721/
HARP_release_102411_Final.pdf.
19 Federal Housing Finance Agency, “FHFA, Fannie Mae and Freddie Mac Announce HARP Changes to Reach More
Borrowers,” press release, October 24, 2011, http://fhfa.gov/webfiles/22721/HARP_release_102411_Final.pdf.
20 Fannie Mae’s detailed guidance on the program changes can be found at https://www.efanniemae.com/sf/guides/ssg/
annltrs/pdf/2011/sel1112.pdf. Freddie Mac’s detailed guidance on the changes can be found at
http://www.freddiemac.com/sell/guide/bulletins/pdf/bll1122.pdf.
21 Federal Housing Finance Agency, Foreclosure Prevention & Refinance Report: October 2011, December 20, 2011,
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loan-to-value ratios between 80% and 105%, while nearly 83,000 mortgages had loan-to-value
ratios above 105% up to 125%.
Home Affordable Modification Program (HAMP)
The mortgage modification piece of the Administration’s Making Home Affordable program is
the Home Affordable Modification Program (HAMP).22 HAMP has been modified or updated a
number of times since its original details were announced, including changes to the program’s
rules and the implementation of additional HAMP programs to attempt to assist certain groups,
such as unemployed and underwater borrowers. These changes are described in the “Additional
HAMP Components and Program Changes” section.23
Through HAMP, the government provides financial incentives to participating mortgage servicers
that provide loan modifications to eligible troubled borrowers in order to reduce the borrowers’
monthly mortgage payments to no more than 31% of their monthly income. In order to qualify, a
borrower must have a mortgage on a single-family residence that was originated on or before
January 1, 2009, must live in the home as his or her primary residence, and must have an unpaid
principal balance on the mortgage that is no greater than the Fannie Mae/Freddie Mac conforming
loan limit in high-cost areas ($729,750 for a one-unit property). Furthermore, the borrower must
currently be paying more than 31% of his or her monthly gross income toward mortgage
payments, and must be experiencing a financial hardship that makes it difficult to remain current
on the mortgage. Borrowers need not already be delinquent on their mortgages in order to qualify.
Servicers participating in HAMP conduct a “net present value test” (NPV test) on eligible
mortgages that compares the expected returns to investors from doing a loan modification to the
expected returns from pursuing a foreclosure. If the expected returns from a loan modification are
greater than those from foreclosure, servicers are required to reduce borrowers’ payments to no
more than 38% of monthly income. The government then shares half the cost of reducing
borrowers’ payments from 38% of monthly income to 31% of monthly income. Servicers reduce
borrowers’ payments by reducing the interest rate, extending the loan term, and forbearing
principal, in that order, as necessary to reach the payment ratio. Servicers can reduce interest rates
to as low as 2%. The new interest rate must remain in place for five years; after five years, if the
interest rate is below the market rate at the time the modification agreement was completed, the
interest rate can rise by one percentage point per year until it reaches that market rate. Borrowers
must make modified payments on time during a three-month trial period before the modification
is converted to permanent status.

(...continued)
p. 5, available at http://www.fhfa.gov/webfiles/22853/Oct2011FPM122011.pdf.
22 HAMP shares many features of earlier foreclosure prevention programs, such as the Federal Deposit Insurance
Corporation’s plan to modify loans held by the failed IndyMac Bank, and Fannie Mae’s and Freddie Mac’s Streamlined
Modification Program. These programs are described in detail in Appendix B.
23 Treasury’s guidance on HAMP for non-GSE mortgages is available in a handbook that is updated periodically to
incorporate new guidance or changes to the program. That handbook is available at https://www.hmpadmin.com/portal/
index.jsp. HAMP guidance related to mortgages owned or guaranteed by Fannie Mae or Freddie Mac can be found on
those entities’ respective websites. In general, the HAMP guidance for GSE mortgages is similar to the guidance for
non-GSE mortgages, but it is not always identical.
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The Home Affordable Modification Program is voluntary, but once a servicer signs an agreement
to participate in the program, that servicer is bound by the rules of the program and is required to
modify eligible mortgages according to the program guidelines. The government provides
incentives to servicers, investors, and borrowers for participation. Servicers receive an upfront
incentive payment for each successful permanent loan modification, an additional payment for
modifications made for borrowers who are not yet delinquent, and a “pay-for-success” payment
for up to three years if the borrower remains current after the modification. The borrower can also
receive a “pay-for-success” incentive payment (in the form of principal reduction) for up to five
years if he or she remains current after the modification is finalized. Investors receive the
payment cost-share incentive (that is, the government’s payment of half the cost of reducing the
monthly mortgage payment from 38% to 31% of monthly income), and can receive incentive
payments for loans modified before a borrower becomes delinquent. Companies that receive
funding through Troubled Assets Relief Program (TARP) or Financial Stability Plan (FSP)
programs announced after the announcement of Making Home Affordable are required to
participate in HAMP.
Modifications can be made through HAMP until December 31, 2012, unless the program is
terminated before that date. On March 29, 2011, the House passed H.R. 839, which, if enacted,
would terminate the program and rescind unobligated funds. Borrowers who are currently
participating in the program would not be affected if this bill becomes law. CBO estimated that
H.R. 839 would reduce direct federal spending by $1.4 billion over a 10-year period.24
HAMP Funding
The Administration originally estimated that HAMP would cost $75 billion. Of this amount, $50
billion was to come from TARP funds, and $25 billion was to come from Fannie Mae and Freddie
Mac for the costs of modifying mortgages that those entities own or guarantee.25 Treasury has
since revised its estimate of the amount of TARP funds that will be used for HAMP, and has used
some of the $50 billion originally allocated to HAMP to help pay for other foreclosure-related
programs (the Hardest Hit Fund and the FHA Refinance program, both described in later sections
of this report).Treasury has now committed $45.6 billion to its foreclosure prevention programs,
rather than the initial $50 billion. Of this amount, nearly $30 billion is committed to HAMP and
its related programs, $7.6 billion is committed to the Hardest Hit Fund, and up to just over $8
billion is committed to the FHA Short Refinance Program. As of January 10, 2012, $2.26 billion
of the funding committed to HAMP has been disbursed.26
HAMP Results to Date
The Administration originally estimated that HAMP could eventually help up to between 3
million and 4 million homeowners. The Treasury Department releases monthly reports detailing

24 Congressional Budget Office, H.R. 839 HAMP Termination Act of 2011, cost estimate, March 11, 2011,
http://cbo.gov/ftpdocs/120xx/doc12097/hr839.pdf.
25 Department of the Treasury, Section 105(a) Troubled Assets Relief Program Report to Congress for the Period
February 1, 2009 to February 28, 2009, p. 1, available at http://www.financialstability.gov/docs/
105CongressionalReports/105aReport_03062009.pdf.
26 U.S. Department of the Treasury, Daily TARP Update for 01/10/2012, http://www.treasury.gov/initiatives/financial-
stability/briefing-room/reports/tarp-daily-summary-report/TARP%20Cash%20Summary/
Daily%20TARP%20Update%20-%2001.10.2012.pdf.
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the program’s progress. These reports offer a variety of information, including the number of
overall trial and permanent modifications made under HAMP and the number of each that are
currently active, the number of trial and permanent modifications made by individual servicers,
and the number of trial and permanent modifications underway in each state.27 According to the
November 2011 report, which includes data through the November 2011 HAMP reporting cycle,
there are nearly 831,000 HAMP modifications that are currently active. Of these, about 80,000
are active trial modifications and nearly 751,000 are active permanent modifications.28 Over
764,000 trial modifications and over 159,000 permanent modifications have been canceled since
the program began.
Figure 2 illustrates the total number of active modifications, both trial and permanent, in each
month since January 2010. Since mid-2010, the total number of active modifications has
generally been increasing, driven by an increasing number of active permanent modifications.
The total number of active trial modifications has generally been decreasing as trial modifications
convert to permanent status or are canceled, and fewer new trial modifications have been started
as the program has aged.

Figure 2. Total Active HAMP Modifications by Month
January 2010–November 2011
1,200,000
1,000,000
800,000
600,000
400,000
200,000
0
Ja
Mar
May
Jul-10
S
No
J
Mar
May
Jul-11
S
No
n-
ep-
an-
ep-
10
-
v
v
1
-
-
-
0
-1
11
-
0
10
10
11
11
11
11
Active Trials
Active Permanent Mods

Source: Figure created by CRS based on data from Treasury’s monthly Making Home Affordable Program
Servicer Performance Reports.

27 Treasury’s monthly reports on HAMP can be found at http://www.treasury.gov/initiatives/financial-stability/results/
MHA-Reports/Pages/default.aspx.
28 U.S. Department of the Treasury, Making Home Affordable Program Servicer Performance Report Through
November 2011
, January 9, 2012, p. 2, http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/
Documents/FINAL_Nov%202011%20MHA%20Report.pdf.
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Figure 3 shows the number of new HAMP trial modifications and new HAMP permanent
modifications in each month from the beginning of 2010 to the present. As the figure illustrates,
the number of new trials declined sharply during the beginning of 2010. This was probably at
least in part due to a program change that required servicers to verify a borrower’s income
information before approving a trial modification, rather than allowing servicers to verify
borrower income during the trial period but before the modification became permanent. (See the
“Additional Changes” section for more information on this program change.) Since around May
2010, the number of new trial modifications that have begun each month has fluctuated within a
range of between about 20,000 and 40,000. The number of new permanent modifications
increased each month in the beginning of 2010, with a peak of over 68,000 new permanent
modifications in April 2010, before decreasing and then leveling out. Since mid-2010, the number
of new permanent modifications beginning each month has generally been between 25,000 to
35,000.
Figure 3. New Trial and Permanent HAMP Modifications by Month
January 2010–November 2011
120,000
100,000
80,000
60,000
40,000
20,000
0
Ja
J
N
n
M
M
Ju
S
N
Ja
M
M
u
S
-
a
a
e
o
a
a
e
o
1
r
y
l-
p
v
n
r
y-
l-
p
v
0
-10
-1
1
-
1
0
0
-10
-10
11
-11
11
1
-11
-11
New Permanent Mods
New Trials

Source: Figure created by CRS based on data from Treasury’s monthly Making Home Affordable Program
Servicer Performance Reports.
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Conversion of Trial Modifications to Permanent Status
After HAMP had been in place for several months, many observers began to express concern at
the high number of trial modifications that were being canceled rather than converting to
permanent status and the length of time that it was taking for trial modifications to become
permanent. In order for a modification to become permanent, a borrower must make all of the
trial period payments on time, and must submit all necessary documentation (such as tax returns,
proof of income, and a signed Modification Agreement) to the servicer. In response to these
concerns, Treasury took a number of steps to attempt to facilitate the conversion of trial
modifications to permanent modifications. These steps have included increased reporting
requirements and monitoring of servicers, and outreach efforts to borrowers to help them
understand and meet the program’s documentation requirements.29 Additionally, as noted earlier
and described more fully in the “Additional Changes” section of this report, Treasury changed the
program guidelines to require servicers to have documented income information from borrowers
before offering a trial modification; previously, servicers were allowed to begin a trial
modification based on stated income information, but had to verify this information in order for a
modification to become permanent. This change was expected to result in more of trial
modifications converting to permanent modifications going forward. As of November 2011,
Treasury reported that 83% of trial modifications that had begun since June 1, 2010 had
converted to permanent status.
Beginning with the April 2010 monthly report, Treasury began reporting conversion rates of trial
modifications to permanent modifications for individual servicers, along with other metrics
related to individual servicers’ performance.
Servicer Performance
In the April 2011 monthly report, Treasury released comprehensive results of an examination of
the performance of the ten largest servicers participating in HAMP, and indicated that it would
continue to release the results of these servicer assessments on a quarterly basis. As a result of this
examination, Treasury announced that it was going to withhold incentive payments to three of the
largest participating servicers due to findings that the servicers’ performance under the program
was not meeting Treasury’s standards. The servicers, Bank of America, JP Morgan Chase, and
Wells Fargo, were all found to need “substantial” improvement in several areas. Treasury said
that it would reinstate the incentive payments when the servicers’ performance improved. A
fourth servicer, Ocwen, was found to need substantial improvement as well, but Treasury did not
withhold incentive payments from Ocwen at that time due to a finding that its performance was
partially due to a loan portfolio that it had bought from another company. The remaining six of
the ten largest servicers were found to need moderate improvement, but Treasury did not
withhold incentive payments from those servicers at that time.30

29 U.S. Department of the Treasury and U.S. Department of Housing and Urban Development, “Obama Administration
Kicks Off Mortgage Modification Conversion Drive,” press release, November 30, 2009, available at http://treas.gov/
press/releases/tg421.htm.
30 U.S. Department of the Treasury, Making Home Affordable Program Performance Report Through April 2011, June
9, 2011. Servicer assessment results begin on page 14. All monthly reports can be found at http://www.treasury.gov/
initiatives/financial-stability/results/MHA-Reports/Pages/default.aspx.
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In the July 2011 monthly report, Treasury continued to find that Bank of America and JP Morgan
Chase needed substantial improvement. Five servicers, including Wells Fargo and Ocwen, were
found to need moderate improvement, while three servicers (GMAC, Litton, and OneWest Bank)
were found to need only minor improvement.31 By the October monthly report, only one servicer,
JP Morgan Chase, was found by Treasury to need substantial improvement. Seven servicers,
including Bank of America, Wells Fargo, Ocwen, GMAC, and Litton, were found to need
moderate improvement, and two servicers, OneWest Bank and Select Portfolio Servicing, were
found to need only minor improvement.32
Additional HAMP Components and Program Changes
Since the program’s announcement, Treasury has announced several changes to HAMP, as well as
a number of additional components of the program. Some of the major changes and additional
components include the following:
Second Lien Modification Program (2MP)33
Many borrowers have second mortgages on their homes. Second mortgages can cause problems
for loan modification programs because (1) modifying the first lien may not reduce households’
total monthly mortgage payments to an affordable level if the second mortgage remains
unmodified, and (2) holders of primary mortgages are often hesitant to modify the mortgage if the
second mortgage holder does not agree to re-subordinate the second mortgage to the first
mortgage, or to modify the second mortgage as well. Under 2MP, if the servicer of the second lien
is participating in 2MP, then that servicer must agree either to modify the second lien in
accordance with program guidelines, or to extinguish the second lien entirely, when a borrower’s
first mortgage is modified under HAMP. (Servicers sign up to participate in 2MP separately from
signing up to participate in HAMP.)
Under 2MP, if a servicer modifies a second lien, it can receive an upfront incentive payment of
$500. Servicers can also receive “pay-for-success” payments of up to $250 per year for up to
three years, if the monthly second mortgage payments are reduced by 6% or more and if the
borrower remains current on both the HAMP modification and the 2MP modification. Borrowers
can receive annual “pay-for-success” payments of up to $250 per year for up to five years (in the
form of principal reduction) if the second mortgage payments have been reduced by 6% or more
and if the borrowers remain current on both the HAMP and 2MP modifications. Investors can
receive compensation for modified second liens according to a cost-sharing formula. Servicers
can also receive incentives for extinguishing second liens, and investors receive compensation for
extinguished second liens according to a cost-sharing formula.
Treasury reports that nearly 44,000 second-lien modifications are active under 2MP as of
November 2011.34

31 U.S. Department of the Treasury, Making Home Affordable Program Performance Report Through July 2011,
September 1, 2011. Servicer assessment results begin on page 16.
32 U.S. Department of the Treasury, Making Home Affordable Program Performance Report Through October 2011,
December 7, 2011. Servicer assessment results begin on page 16.
33 Servicer guidelines on 2MP are available at https://www.hmpadmin.com/portal/programs/second_lien.html.
34 U.S. Department of the Treasury, Making Home Affordable Program Servicer Performance Report Through
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Home Affordable Foreclosure Alternatives Program (HAFA)35
Through the Home Affordable Foreclosure Alternatives Program (HAFA), when a borrower
meets the basic eligibility criteria for HAMP, but does not ultimately qualify for a modification,
does not successfully complete the trial period, or defaults on a HAMP modification, participating
servicers can receive incentive payments for completing a short sale or a deed-in-lieu of
foreclosure as an alternative to foreclosure.36 Servicers can receive incentive payments of $1,500
for each short sale or deed-in-lieu that is successfully executed, and borrowers can receive
incentive payments of $3,000 to help with relocation expenses.37 Investors can receive up to a
maximum of $2,000 if they agree to share a portion of the proceeds of the short sale with any
subordinate lienholders. (The subordinate lienholders, in turn, must release their liens on the
property and waive all claims against the borrower for the unpaid balance of the subordinate
mortgages.) In order to attempt to streamline the process of short sales and deeds-in-lieu of
foreclosure under HAFA, Treasury provides standardized documentation and processes for
participating servicers to use. HAFA became active on April 5, 2010, although servicers had the
option to begin implementing the program before this date.
Treasury reports that over 24,000 HAFA transactions have been completed as of November
2011.38 Most of these transactions have been short sales rather than deeds-in-lieu of foreclosure.
Home Price Decline Protection
To encourage modifications even in markets where home prices are continuing to fall, lenders or
investors are eligible for Home Price Decline Protection incentive payments for successful
modifications in areas with declining home prices. The calculation of these incentive payments
takes into account the recent rate of home price declines in the area where the home is located and
the unpaid principal balance of the mortgage.
Home Affordable Unemployment Program (UP)
On March 26, 2010, the Administration announced the Home Affordable Unemployment
Program (UP), which targets borrowers who are unemployed. Under UP, participating servicers
are required to offer forbearance periods to unemployed borrowers who apply for HAMP and
meet the UP eligibility criteria before evaluating those borrowers for HAMP. The forbearance

(...continued)
November 2011, January 9, 2012, p. 4, http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/
Documents/FINAL_Nov%202011%20MHA%20Report.pdf.
35 Servicer guidelines on HAFA are available at https://www.hmpadmin.com/portal/programs/
foreclosure_alternatives.html.
36 Short sales and deeds-in-lieu are described in footnote 11. Under HAFA, the lender must agree to accept the
proceeds of the short sale or the deed and property as full payment of the mortgage debt, and may not pursue borrowers
for any remaining amounts owed on the mortgage. Short sales and deeds-in-lieu have a negative impact on a
borrower’s credit, but they may result in fewer negative consequences overall for the borrower than a foreclosure.
37 Treasury has increased the amount of incentive compensation offered under HAFA to these amounts since the
program was first announced.
38 U.S. Department of the Treasury, Making Home Affordable Program Servicer Performance Report Through
November 2011
, January 9, 2012, p. 5, http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/
Documents/FINAL_Nov%202011%20MHA%20Report.pdf.
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period lasts for a minimum of twelve months, or until the borrower becomes re-employed.39
Borrowers’ mortgage payments are lowered to 31% or less of their monthly income through
principal forbearance during this time period. After the forbearance period ends, it is expected
that some borrowers will have regained employment and will not need further assistance. Other
borrowers, such as those who are re-employed but at a lower salary, may be able to qualify for a
regular HAMP modification. Still other borrowers may qualify for a foreclosure alternative such
as a short sale or a deed-in-lieu of foreclosure, and some borrowers ultimately may not be able to
avoid foreclosure. Participating servicers were required to begin offering forbearance plans to
qualified unemployed borrowers by July 1, 2010, but could choose to implement the program
earlier.40
Treasury reports that nearly 17,000 UP forbearance plans have begun through November 2011.41
Principal Reduction Alternative (PRA)
Another change to HAMP announced on March 26, 2010, is the Principal Reduction Alternative
(PRA), in which participating servicers are required to consider reducing principal balances as
part of HAMP modifications for homeowners who owe at least 115% of the value of their home.
Servicers will have to run two net present value tests for these borrowers: the first will be the
standard NPV test, and the second will include principal reduction. If the net present value of the
modification is higher under the test that includes principal reduction, servicers have the option to
reduce principal. However, they are not required to do so. If the principal is reduced, the amount
of the principal reduction will initially be treated as principal forbearance; the forborne amount
will then be forgiven in three equal amounts over three years as long as the borrower remains
current on his or her mortgage payments. The Administration will also offer incentives to
servicers specifically for reducing principal. The PRA went into effect on October 1, 2010.42
According to Treasury, over 52,000 PRA modifications were active as of November 2011. About
16,000 of these are active trial modifications, and about 36,000 are active permanent
modifications.43

39 Originally, the forbearance period was three months. Treasury extended it to twelve months in Supplemental
Directive 11-07, Making Home Affordable Program – Expansion of Unemployment Forbearance, July 25, 2011,
available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/sd1107.pdf. The change became
effective on October 1, 2011.
40 The original detailed guidelines on the Home Affordable Unemployment Program were released in Supplemental
Directive 10-04 on May 11, 2010. These guidelines are available at https://www.hmpadmin.com/portal/docs/
hamp_servicer/sd1004.pdf. Updated guidance can be found in Treasury’s Making Home Affordable Handbook,
available at https://www.hmpadmin.com/portal/index.jsp.
41 U.S. Department of the Treasury, Making Home Affordable Program Servicer Performance Report Through
November 2011
, January 9, 2012, p. 5, http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/
Documents/FINAL_Nov%202011%20MHA%20Report.pdf.
42 Detailed guidelines on the Principal Reduction Alternative were released in Supplemental Directive 10-05 on June 3,
2010. These guidelines are available at https://www.hmpadmin.com/portal/docs/hamp_servicer/sd1005.pdf.
43 U.S. Department of the Treasury, Making Home Affordable Program Servicer Performance Report Through
November 2011
, January 9, 2012, p. 5, http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/
Documents/FINAL_Nov%202011%20MHA%20Report.pdf.
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Additional Changes
A number of other changes to the HAMP guidelines have been implemented since the program
began. Some notable changes include the following:
• When HAMP began, Treasury allowed servicers to approve borrowers for trial
modifications on the basis of stated income information. Borrowers then had to
submit documentation verifying their income information before the trial
modification could convert to permanent status. In cases where the stated income
information differed from the documented information, servicers often had to re-
evaluate borrowers for the program (for example, by running a new NPV test),
which sometimes resulted in borrowers who had been approved for a trial
modification being denied for a permanent modification. Since June 1, 2010,
Treasury requires all income information to be verified before a borrower can be
approved for a trial period plan. 44 As described earlier in the “HAMP Results to
Date” section, this change was expected to result in a greater proportion of trial
modifications converting to permanent status.
• The original HAMP guidelines prohibited servicers from conducting a
foreclosure sale while they were evaluating a borrower for HAMP, or while a
borrower was in a HAMP trial period. Servicers also were not allowed to refer
new loans to foreclosure during the 30-day window that borrowers had to submit
documentation indicating that they intended to accept a trial modification offer.
However, foreclosures in process were allowed to continue, as long as no
foreclosure sale occurred, and loans could be referred to foreclosure at the same
time that a borrower was being evaluated for HAMP. Since June 1, 2010,
Treasury prohibits servicers from referring eligible borrowers to foreclosure until
they have been evaluated for HAMP, or until reasonable outreach efforts have not
been successful. Foreclosures that were already in process prior to this change
are allowed to continue, although servicers must take any actions that they have
the authority to undertake to halt foreclosure proceedings for borrowers in trial
modifications. Treasury also now requires enhanced disclosures to borrowers that
describe how evaluation for HAMP or a trial modification may happen at the
same time as foreclosure proceedings, but that explain that the home will not be
sold in a foreclosure sale while the borrower is being evaluated for HAMP or is
in a trial period.45
• Treasury has strengthened a number of other disclosure requirements since
HAMP began, including requiring increased disclosures to borrowers who were
denied a HAMP modification describing the reason for their denial. Treasury also
provided more guidance on the outreach efforts that servicers must make to
borrowers who may be eligible for HAMP.
• The Dodd-Frank Wall Street Reform And Consumer Protection Act (P.L. 111-
203) made some changes to HAMP. These changes included a requirement that
Treasury make a net present value test available on the internet, based on

44 This change is described in detail in Treasury’s Supplemental Directive 10-01, issued on January 28, 2010, and
available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/sd1001.pdf.
45 These changes are described in detail in Treasury’s Supplemental Directive 10-02, issued on March 24, 2010, and
available at https://www.hmpadmin.com/portal/programs/docs/hamp_servicer/sd1002.pdf.
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Treasury’s NPV methodology, along with a disclaimer stating that specific
servicers’ NPV models may differ in some respects.46 Treasury launched this
online NPV calculator in May 2011, and it is available at
https://checkmynpv.com/. The law also requires that servicers provide borrowers
with certain NPV inputs upon denying the borrowers for HAMP modifications;
this differed from Treasury’s existing guidance, which required borrowers to ask
servicers to see certain NPV inputs within a certain time period if the borrower
was denied a modification due to a negative NPV result.
Hardest Hit Fund
On February 19, 2010, the Obama Administration announced that it would make up to a total of
$1.5 billion available to the housing finance agencies (HFAs) of five states that had experienced
the greatest declines in home prices. This program is known as the Hardest Hit Fund, and several
additional rounds of funding have been announced since its inception. The funding comes from
the TARP funds that Treasury initially set aside for HAMP. Therefore, all Hardest Hit Fund
funding must be used in ways that comply with the Emergency Economic Stabilization Act of
2008 (P.L. 110-343), which means that the funds must be used by eligible financial institutions
and must be used for purposes that are allowable under P.L. 110-343.47
The five states to receive funding in the first round of the Hardest Hit Fund are California,
Arizona, Florida, Nevada, and Michigan.48 The Administration set maximum allocations for each
state based on a formula, and the HFAs of those states were required to submit their plans for the
funds to Treasury for approval in order to be awarded funds through the program. The funding
can be used for a variety of programs that address foreclosures and are tailored to specific areas,
including programs to help unemployed homeowners, programs to help homeowners who owe
more than their homes are worth, or programs to address the challenges that second liens pose to
mortgage modifications.
On March 29, 2010, the Administration announced a second round of funding for the Hardest Hit
Fund. This second round of funding made up to a total of an additional $600 million available to
five states that have large proportions of their populations living in areas of economic distress,
defined as counties with unemployment rates above 12% in 2009 (the five states that received
funding in the first round were not eligible). The five states that received funding though this
second round are North Carolina, Ohio, Oregon, Rhode Island, and South Carolina. These states
can use the funds to support the same types of programs eligible under the first round of funding,
and are subject to the same requirements.49

46 Servicers are allowed to use their own values for certain NPV inputs on the basis of their own portfolio experience,
but such allowed changes are limited and must be approved by Treasury.
47 Guidelines for HFAs’ proposals for the first round of funding are available at
http://www.makinghomeaffordable.gov/docs/HFA%20FAQ%20—%20030510%20FINAL%20(Clean).pdf.
48 See U.S. Department of the Treasury, “Help for the Hardest Hit Housing Markets,” press release, February 19, 2010,
available at http://makinghomeaffordable.gov/pr_02192010.html. See also “Housing Finance Agency Innovation Fund
for the Hardest Hit Housing Markets (“HFA Hardest Hit Fund”): Frequently Asked Questions,” available at
http://www.makinghomeaffordable.gov/docs/HFA%20FAQ%20—%20030510%20FINAL%20(Clean).pdf, for more
information on the program and for maximum funding allocations for each state in the first round.
49 See U.S. Department of the Treasury, “Administration Announces Second Round of Assistance for Hardest-Hit
Housing Markets,” press release, March 29, 2010, available at http://www.financialstability.gov/latest/
pr_03292010.html. This press release also includes the maximum funding allocation for each state in the second round.
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On August 11, 2010, the Administration announced a third round of funding for the Hardest Hit
Housing Fund.50 This third round of funding makes a total of up to $2 billion available to 17
states and the District of Columbia, all of which had unemployment rates higher than the national
average over the previous year. Nine of the states that are eligible for the third round of funding
also received funding in one of the previous two rounds of Hardest Hit Fund funding.51 The states
that received funding in the third round but not in either of the previous two rounds are Alabama,
Georgia, Illinois, Indiana, Kentucky, Mississippi, New Jersey, Tennessee, and the District of
Columbia. Like the first two rounds of funding, states must submit plans for the funds for
Treasury’s approval. Unlike the first two rounds of funding, states must use funds from the third
round specifically for foreclosure prevention programs that target the unemployed.
In September 2010, Treasury announced an additional $3.5 billion of funding to be distributed to
the 18 states and the District of Columbia that were receiving funding through earlier rounds,
bringing the total amount of funding allocated to the Hardest Hit Fund to $7.6 billion. Table 1
shows the total allocation of funds, through all rounds of funding, for each state that is receiving
funding through the Hardest Hit Fund.52
Table 1. Hardest Hit Fund Allocations to States
(dollars in millions)
State Funding
Alabama $162.5
Arizona $267.8
California $1,975.3
Florida $1,057.8
Georgia $339.3
Illinois $445.6
Indiana $221.7
Kentucky $148.9
Michigan $498.6
Mississippi $101.9
Nevada $194.0
New Jersey
$300.5
North Carolina
$482.8
Ohio $570.4
Oregon $220.0
Rhode Island
$79.4

50 See U.S. Department of the Treasury, “Obama Administration Announces Additional Support for Targeted
Foreclosure-Prevention Programs To Help Homeowners Struggling With Unemployment,” press release, August 11,
2010, available at http://financialstability.gov/latest/pr_08112010.html.
51 Except for Arizona, every state that received funding in one of the first two rounds of the Hardest Hit Fund also
received funding in the third round.
52 Descriptions of the programs that each state is funding through the Hardest Hit Fund are available at
http://www.financialstability.gov/roadtostability/hardesthitfund.html.
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State Funding
South Carolina
$295.4
Tennessee $217.3
Washington, DC
$20.7
Total $7,600.0
Source: http://www.financialstability.gov/roadtostability/hardesthitfund.html.
FHA Short Refinance Program
On March 26, 2010, the Administration announced a new Federal Housing Administration (FHA)
Short Refinance Program for homeowners who owe more than their homes are worth. Detailed
program guidance was released on August 6, 2010.53 Under the program, certain homeowners
who owe more than their homes are worth may be able to refinance into new, FHA-insured
mortgages for an amount lower than the home’s current value. The original lender will accept the
proceeds of the new loan as payment in full on the original mortgage; the new lender will have
FHA insurance on the new loan; and the homeowner will have a first mortgage balance that is
below the current value of the home, thereby giving him or her some equity. Homeowners will
have to be current on their mortgages to qualify for this program. Further, the balance on the first
mortgage loan will have to be reduced by at least 10%. This program is voluntary for lenders and
borrowers, and borrowers with mortgages already insured by FHA are not eligible.
The FHA Short Refinance Program is similar in structure to the Hope for Homeowners program
(described later in this report), which was still active at the time that the FHA Short Refinance
Program began but has since ended. However, there are some key differences between the two
programs. First, Hope for Homeowners required that any second liens be extinguished. Under the
new FHA refinancing plan, second liens are specifically allowed to remain in place. Incentives
will be offered for the second lien-holder to reduce the balance of the second lien, and the
homeowner’s combined debt on both the first and the second lien will not be allowed to exceed
115% of the value of the home after the refinance. Second, under Hope for Homeowners,
borrowers could be either current or delinquent on their mortgages and qualify for the program.
Under the new FHA refinance plan, borrowers will have to be current on their mortgages. Finally,
under Hope for Homeowners, borrowers had to agree to share some of their initial equity in the
home with the government when the house was eventually sold. The FHA Short Refinance
Program does not appear to require any equity or appreciation sharing.
The FHA Refinance Program began on September 7, 2010. As of the end of November 2011,
FHA reported refinancing about 500 loans through the program.54 Treasury has said that it will
use up to $8 billion of the TARP funds originally set aside for HAMP to help pay for the cost of
this program; additional program costs will be borne by FHA. The FHA Short Refinance Program
is to be available until December 31, 2012, unless it is terminated before that date. On March 10,
2011, the House passed H.R. 830, which, if enacted, would terminate the FHA Short Refinance
Program and rescind unexpended funds. Borrowers whose loans had already been refinanced

53 FHA Mortgagee Letter 2010-23, “FHA Refinance of Borrowers in Negative Equity Positions,” August 6, 2010,
available at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/.
54 Federal Housing Administration, FHA Outlook, November 2011, available at http://portal.hud.gov/hudportal/
documents/huddoc?id=ol_current.pdf.
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through the program would not be affected if this bill became law. CBO estimated that enacting
H.R. 830 would decrease the federal deficit by $175 million.55
Recently Ended Federal Foreclosure Prevention
Initiatives

This sections describes federal foreclosure prevention initiatives that recently ended. However,
some borrowers may be continuing to receive assistance through these programs if they began
participating in the program prior to the program’s end date. For information on earlier federal
foreclosure prevention initiatives, see Appendix B.
Emergency Homeowners Loan Program
The Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111-203) included up to
$1 billion for HUD to use to administer a program to provide short-term loans to certain mortgage
borrowers who had experienced a decrease in income due to unemployment, underemployment,
or a medical emergency, in order to help them make their mortgage payments. HUD chose to
target this funding to the 32 states (and Puerto Rico) that did not receive funding through the
Administration’s Hardest Hit Fund (described in the “Hardest Hit Fund” section of this report).
HUD termed this program the Emergency Homeowners Loan Program (EHLP).56 By statute,
HUD was not able to enter into new loan agreements under EHLP after September 30, 2011.
The Emergency Homeowners Loan Program was administered through two different approaches.
Under the first approach, state housing finance agencies that operate programs that were deemed
to be “substantially similar” to the Emergency Homeowners Loan Program could use EHLP
funds for their existing programs. On April 1, 2011, HUD announced that it had deemed
programs in five states (Connecticut, Delaware, Idaho, Maryland, and Pennsylvania) to be
substantially similar to the EHLP and had approved those states’ EHLP allocations to be used for
their state programs. The EHLP programs in the remaining states used the second approach to
administer the program.
Under the second approach, housing counseling organizations that are part of the NeighborWorks
network57 took applications for the program and performed certain other administrative and
outreach functions (HUD retained responsibility for program monitoring and compliance, and for
managing the note associated with the Emergency Homeowners Loan Program loan). Borrowers
were able to begin applying for the program using this approach on June 20, 2011. To apply,
borrowers submitted a pre-application to a participating housing counseling agency.58 After all

55 Congressional Budget Office, H.R. 830 FHA Refinance Program Termination Act of 2011, cost estimate, March 7,
2011, http://cbo.gov/ftpdocs/120xx/doc12089/hr830.pdf.
56 Details on the program can be found on HUD’s website at http://www.hud.gov/offices/hsg/sfh/hcc/ehlp/
ehlphome.cfm.
57 NeighborWorks America is a HUD-approved housing counseling intermediary with a nationwide network of housing
counseling affiliates. For more information on NeighborWorks in general, see the organization’s webpage at
http://www.nw.org/network/aboutUs/aboutUs.asp. For more information on NeighborWorks’s foreclosure prevention
activities, see “Foreclosure Counseling Funding to NeighborWorks America” later in this report.
58 Information on applying for the EHLP can be found at http://nw.org/network/foreclosure/nfmcp/ehlpconsumers.asp.
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pre-applications were received, qualified applicants were invited to submit a complete
application. If there were more qualified pre-applications than funds available, then borrowers
were to be chosen by lottery to submit full applications. Borrowers originally had to submit pre-
applications by July 22, 2011, to be considered for the program, although that deadline was later
extended to September 15, 2011.59
To qualify for the EHLP, borrowers had to meet certain conditions, including the following:
• Borrowers must have had a household income of 120% or less of area median
income prior to the unemployment, underemployment, or medical event that
made the household unable to make its mortgage payments;
• Borrowers must have had a current gross income of at least 15% less than the
household’s income prior to the unemployment, underemployment, or medical
event;
• Borrowers must have been at least three months delinquent and have received
notification of the lender’s intent to foreclose;
• Borrowers must have had a reasonable likelihood of being able to resume making
full monthly mortgage payments within two years, and had a total debt-to-income
ratio of less than 55%; and
• Borrowers must have resided in the property as a principal residence, and the
property must have been a single-family (one- to four-unit) property.
The loans were to be used to pay arrearages on the mortgage as well as to assist the borrower in
making mortgage payments for up to 24 months going forward. An individual borrower was
eligible to receive up to a maximum of $50,000. Borrowers were required to contribute 31% of
their monthly gross income at the time of their application (but in no case less than $25) to
monthly payments on the first mortgage, and were required to report any changes in income or
employment status while they were receiving assistance. The assistance ends when one of the
following events occurs: (1) the maximum loan amount has been reached; (2) the homeowner
regains an income level of 85% or more of its income prior to the unemployment or medical
event; (3) the homeowner no longer resides in or sells the property or refinances the mortgage; (4)
the borrower defaults on his portion of the first mortgage payments; or (5) the borrower fails to
report changes in employment status or income.
Loans made through the program were five-year, zero-interest, non-recourse loans secured by
junior liens on the property. The loans will have declining balances; the borrowers are not
required to make payments on the loans for a five-year period as long as the borrowers remain in
the properties as their principal residences and stay current on their first mortgage payments. If
these conditions are met, the balance of the loan will decline by 20% annually until the debt is
extinguished at the end of five years. However, the borrower will be responsible for repaying the
loan to HUD if one of the following events occurs: (1) the borrower retains ownership of the
home but no longer resides in it as a principal residence; (2) the borrower defaults on his or her
first mortgage payments; or (3) the borrower receives net proceeds from selling the home or
refinancing the mortgage. In the third case, if the proceeds of the sale or refinance are not

59 U.S. Department of Housing and Urban Development, “HUD and NeighborWorks America Accepting Additional
Applications for Emergency Homeowners’ Loan Program,” press release, August 29, 2011, http://portal.hud.gov/
hudportal/HUD?src=/press/press_releases_media_advisories/2011/HUDNo.11-177.
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sufficient to repay the entire remaining balance of the loan, the remaining balance will be
considered to have been paid in full and the lien on the property will be released.
Table 2 shows the amounts that HUD designated for the Emergency Homeowners Loan Program
for each state that was eligible for funding.
Table 2. Emergency Homeowners Loan Program Allocations to States
(dollars in millions)
State Allocation
State
Allocation
Alaska $3.9
New
Hampshire
$12.7
Arkansas $17.7
New
Mexico $10.7
Colorado $41.3
New
York $111.6
Connecticut $32.9
North
Dakota $1.3
Delaware $6.0
Oklahoma $15.6
Hawaii $6.3
Pennsylvania
$105.8
Idaho $13.3
Puerto
Rico
$14.7
Iowa $17.4
South
Dakota
$2.1
Kansas $17.7
Texas $135.4
Louisiana $16.7
Utah
$16.6
Maine $10.4
Vermont $4.8
Maryland $40.0
Virginia
$46.6
Massachusetts $61.0 Washington
$56.3
Minnesota $55.8
West
Virginia $8.3
Missouri $49.0
Wisconsin $51.5
Montana $5.7
Wyoming $2.3
Nebraska $8.3


Total
$1,000.0
Source: U.S. Department of Housing and Urban Development, Obama Administration Announces $1 Billion in
Additional Help for Struggling Homeowners in 32 States and Puerto Rico
, press release, October 5, 2010, available at
http://portal.hud.gov/portal/page/portal/HUD/press/press_releases_media_advisories/2010/HUDNo.10-225.

On March 11, 2011, the House passed H.R. 836, which would have terminated the EHLP and
rescinded any unobligated program balances. Any borrowers who had already received loans
through the program would not have been affected if the bill had become law. CBO estimated that
enacting H.R. 836 would have decreased the federal budget deficit by $840 million.60

60 Congressional Budget Office, H.R. 836 Emergency Mortgage Relief Program Termination Act of 2011, cost
estimate, March 7, 2011, http://cbo.gov/ftpdocs/120xx/doc12090/hr836.pdf.
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Hope for Homeowners
Congress created the Hope for Homeowners (H4H) program in the Housing and Economic
Recovery Act of 2008 (P.L. 110-289), which was signed into law on July 30, 2008. The program,
which was voluntary on the part of both borrowers and lenders, offered certain borrowers the
ability to refinance into new mortgages insured by FHA if their lenders agreed to certain loan
modifications. Hope for Homeowners began on October 1, 2008, and ended on September 30,
2011. FHA issued guidance stating that loans had to receive case numbers by July 29, 2011 in
order to be eligible for Hope for Homeowners before the program ended.61
In order to be eligible for the program, borrowers were required to meet the following
requirements:
• The borrower must have had a mortgage that originated on or before January 1,
2008.
• The borrower’s mortgage payments must have been more than 31% of gross
monthly income.
• The borrower must not have owned another home.
• The borrower must not have intentionally defaulted on his or her mortgage or any
other substantial debt within the last five years, and he or she must not have been
convicted of fraud during the last ten years under either federal or state law.
• The borrower must not have provided false information to obtain the original
mortgage.
Under Hope for Homeowners, the lender agreed to write the mortgage down to a percentage of
the home’s currently appraised value, and the borrower received a new loan insured by the FHA.
The home had to be reappraised by an FHA-approved home appraiser in order to determine its
current value, and the lender absorbed whatever loss resulted from the write-down. The new
mortgage was a 30-year fixed-rate mortgage with no prepayment penalties, and could not exceed
$550,440. Homeowners paid an upfront mortgage insurance premium of 2% of the loan balance
and an annual mortgage insurance premium of 0.75% of the loan balance, and any second lien-
holders were required to release their liens. When the homeowner sells or refinances the home, he
or she is required to pay an exit premium to HUD. The exit premium is a percentage of the initial
equity the borrower has in the home after the H4H refinance; if the borrower sells or refinances
the home during the first year after the H4H refinance, the exit premium is 100% of the initial
equity. After five years, the exit premium is 50% of the initial equity.62
Under the original terms of the program, the lender was required to write the loan down to 90%
of the home’s currently appraised value. The upfront and annual mortgage insurance premiums
were originally set at 3% and 1.5%, respectively, and second lien-holders were compensated for
releasing their liens with a share of any future profit from the home’s eventual sale rather than an
upfront payment. Furthermore, homeowners were originally required to share a portion of both

61 See FHA Mortgagee Letter 11-20, “Termination of the Hope for Homeowners (H4H) Program,” June 10, 2011,
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/11-20ml.pdf.
62 See FHA Mortgagee Letter 09-43, available at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/
2009ml.cfm. Initially, borrowers had to share a portion of both their equity and any appreciation in the home’s value
with HUD when the home was sold or refinanced. P.L. 111-22 provided the authority to change this requirement.
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their equity and any appreciation in the home’s value with HUD when the home was eventually
sold or refinanced.
On November 19, 2008, HUD announced three changes to Hope for Homeowners in order to
simplify the program and encourage participation. The authority to make these changes was
granted in the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).63 These changes
did the following: (1) increased the maximum loan-to-value ratio of the new loan to 96.5% of the
home’s currently appraised value, instead of the original 90%, in order to minimize losses to
lenders; (2) allowed lenders to increase the term of the mortgage from 30 to 40 years in order to
lower borrowers’ monthly payments; and (3) offered an immediate payment to second lien-
holders, instead of a share in future profits, in return for their agreement to relinquish the lien.
Congress authorized further changes to the Hope for Homeowners program in the Helping
Families Save Their Homes Act of 2009 (P.L. 111-22), which was signed into law by President
Obama on May 20, 2009. P.L. 111-22 changed the Hope for Homeowners program by allowing
reductions in both the upfront and annual mortgage insurance premiums that borrowers pay;
allowing HUD to offer servicers and H4H mortgage originators incentive payments for each loan
that was successfully refinanced using Hope for Homeowners; and allowing HUD to reduce its
share in any future home price appreciation (and giving HUD the authority to share its stake in
the home’s future appreciation with the original lender or a second lien-holder). P.L. 111-22 also
placed the Hope for Homeowners program under the control of the Secretary of HUD and limited
eligibility for the program to homeowners whose net worth did not exceed a certain threshold.
HUD used the authority granted in both of these laws to make changes to H4H from its original
form. For example, HUD lowered the mortgage insurance premiums; set the maximum loan-to-
value ratio of the new loan at either 96.5% or 90%, based on the borrower’s mortgage debt- and
total debt-to-income ratios and credit score; offered immediate payments to certain second lien-
holders to release their liens; eliminated the shared appreciation feature; and replaced the shared
equity feature with the exit premium.64
The Obama Administration issued guidance for servicers on using Hope for Homeowners
together with the Making Home Affordable program. This guidance required servicers who are
participating in the Making Home Affordable program to screen borrowers for eligibility for
Hope for Homeowners and to use that program for qualified borrowers prior to H4H’s expiration.
The Administration’s guidance also offered incentive payments to servicers who used Hope for
Homeowners, and to lenders who originated new loans under the program.
The Congressional Budget Office originally estimated that up to 400,000 homeowners could be
helped to avoid foreclosure over the life of H4H.65 In total, about 760 borrowers refinanced
through the program.66 Some have suggested that more borrowers and lenders did not use Hope

63 The decision to act on the authority granted in P.L. 110-343 and make these changes was ultimately made by the
Board of Hope for Homeowners, which included the Secretary of HUD and the Secretary of the Treasury, among
others. As described in the text, P.L. 111-22 placed the program under the control of the Secretary of HUD; the Board
then took on an advisory role.
64 For the most recent comprehensive guidance on Hope for Homeowners, including these changes, see FHA
Mortgagee Letter 09-43, available at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2009ml.cfm.
65 Congressional Budget Office, Cost Estimate, Federal Housing Finance Regulatory Reform Act of 2008, June 9,
2008, p. 8, http://www.cbo.gov/ftpdocs/93xx/doc9366/Senate_Housing.pdf.
66 See Federal Housing Administration, FHA Outlook, September 2010 and FHA Outlook, September 2011, both
(continued...)
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Preserving Homeownership: Foreclosure Prevention Initiatives

for Homeowners because the program was too complex. The legislative and administrative
changes described above were intended to address some of the obstacles to participating in the
program.
Other Existing Government Initiatives
In addition to Making Home Affordable and Hope for Homeowners, a number of other programs
have been created by federal, state, and local governments to attempt to stem the rise in
foreclosures and help more homeowners remain in their homes. Although some of these programs
are now obsolete, many continue to operate. (See Appendix B for a description of earlier
foreclosure prevention programs that are generally no longer operational.) This section describes
other recent, ongoing federal programs and policies to prevent foreclosure, and briefly outlines
some state and local foreclosure prevention efforts.
Foreclosure Counseling Funding to NeighborWorks America
Another federal effort to slow the rising number of foreclosures has been to appropriate additional
funding for housing counseling. In particular, Congress has recently appropriated funding
specifically for foreclosure mitigation counseling to be administered by NeighborWorks America,
a non-profit created by Congress in 1978 that has a national network of community partners.67
NeighborWorks traditionally provides housing counseling to homebuyers and homeowners
through its network organizations, and also trains other non-profit housing counseling
organizations in foreclosure counseling.
The Consolidated Appropriations Act, 2008 (P.L. 110-161) provided $180 million for
NeighborWorks to distribute for foreclosure mitigation counseling, which it has done by setting
up the National Foreclosure Mitigation Counseling Program (NFMCP).68 NeighborWorks
competitively awards the funding to qualified housing counseling organizations.69 Congress
directed NeighborWorks to award the funding with a focus on areas with high default and
foreclosure rates on subprime mortgages. The Housing and Economic Recovery Act of 2008 (P.L.
110-289) provided an additional $180 million for NeighborWorks to distribute through the
NFMCP, $30 million of which was to be distributed to counseling organizations to provide legal
help to homeowners facing delinquency or foreclosure.
Since HERA, Congress has continued to provide funding for the NFMCP through annual
appropriations acts. The Omnibus Appropriations Act, 2009 (P.L. 111-8) included $50 million for

(...continued)
available at http://www.hud.gov/offices/hsg/rmra/oe/rpts/ooe/olmenu.cfm.
67 Each year, Congress appropriates funding to HUD to distribute to certified housing counseling organizations to
undertake various types of housing counseling, including pre-purchase counseling and post-purchase counseling.
Congress also appropriates funding to NeighborWorks each year for neighborhood reinvestment activities, including
housing counseling. The recent funding appropriated specifically for foreclosure mitigation counseling is separate from
both of these other usual appropriations.
68 For more information on the National Foreclosure Mitigation Counseling Program, see the NeighborWorks website
at http://www.nw.org/network/nfmcp/default.asp#info.
69 HUD-approved housing counseling intermediaries, state housing finance agencies, and NeighborWorks
organizations are eligible to receive funds through the NFMCP.
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NeighborWorks to distribute through the NFMCP, while the Consolidated Appropriations Act,
2010 (P.L. 111-117) and the Department of Defense and Full-Year Continuing Appropriations
Act, 2011 (P.L. 112-10) each included $65 million. The Consolidated and Further Continuing
Appropriations Act, 2012 (P.L. 112-55) provided $80 million for the NFMCP. Table 3 shows the
funding that has been provided for the NFMCP since its inception.
Table 3. Funding for the National Foreclosure Mitigation Counseling Program
$ in millions
Law Date
Enacted Amount
Consolidated Appropriations Act,
December 26, 2007
$180
2008 (P.L. 110-161)
Housing and Economic Recovery
July 30, 2008
$180
Act of 2008 (P.L. 110-289)
Omnibus Appropriations Act,
March 11, 2009
$50
2009 (P.L. 111-8)
Consolidated Appropriations Act,
December 16, 2009
$65
2010 (P.L. 111-117)
Department of Defense and Ful -
April 15, 2011
$65
Year Continuing Appropriations
Act, 2011 (P.L. 112-10)
Consolidated and Continuing
November 18, 2011
$80
Appropriations Act, 2012 (P.L.
112-55)
Source: P.L. 110-161, P.L. 110-289, P.L. 111-8, P.L. 111-117, P.L. 112-10, P.L. 112-55
Notes: The funds appropriated in P.L. 110-289 included funding for legal assistance for homeowners facing
foreclosure.
Foreclosure Mitigation Efforts Targeted to Servicemembers
The federal government has made a number of efforts to prevent foreclosures specifically among
members of the Armed Forces. The Servicemembers Civil Relief Act (P.L. 108-189), which
became law on December 19, 2003, prohibits foreclosure completions on properties owned by
servicemembers during a period of military service or within 90 days of the servicemember’s
return from military service.70 The law also prohibits evictions of active servicemembers or their
dependents, subject to certain conditions.
The Housing and Economic Recovery Act of 2008 (HERA, P.L. 110-289) directed the Secretary
of Defense to develop a foreclosure counseling program for members of the Armed Forces
returning from active duty abroad. It also amended the Servicemembers Civil Relief Act to extend
the prohibition on foreclosure completions to nine months after a servicemember’s return from
military service until December 31, 2010, after which the 90-day provision would go back into

70 This law is a revision of the Soldiers’ and Sailors’ Civil Relief Act of 1940 (P.L. 76-861), which itself was a revision
of the Soldiers’ and Sailors’ Civil Relief Act of 1918 (P.L. 65-103). Both earlier laws also included foreclosure
protections for members of the military on or recently returned from active duty.
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effect. The Helping Heroes Keep Their Homes Act of 2010 (P.L. 111-346) extended the nine-
month prohibition on foreclosure completions until December 31, 2012.
State and Local Initiatives
In addition to federal efforts to prevent foreclosures, a number of state and local governments
have implemented their own programs aimed at helping homeowners stay in their homes. Some
of these efforts include supporting voluntary or mandatory pre-foreclosure counseling initiatives,
establishing foreclosure mediation programs, imposing foreclosure moratoria, providing short-
term loans to help homeowners at risk of foreclosure, enacting stronger reporting requirements on
lenders’ loan modification efforts, and initiating legal actions. Many states and localities have also
implemented educational efforts to reach out to troubled homeowners.
According to the Pew Charitable Trusts Center on the States, as of April 2008, 20 states had laws
or regulations involving foreclosure mitigation, 24 states had statewide counseling efforts, 13
states had a foreclosure intervention hotline, and 9 states had developed loan funds to help
homeowners refinance into more affordable mortgages or to provide short-term loans to
borrowers facing foreclosure. Furthermore, at least 14 states had created foreclosure prevention
task forces to attempt to address the problem of rising foreclosure rates.71 Since that time, these
numbers have likely increased as states have continued to develop their own responses to
foreclosures.
Private Initiatives
While the government has initiated the mortgage modification programs described above, a
number of private mortgage lenders and servicers have voluntarily attempted to implement their
own foreclosure prevention initiatives. Many private lenders have engaged in ongoing individual
loan modifications for some time, but have launched more targeted programs to help troubled
borrowers in recent years. Many lenders also participate in federal programs such as HAMP.
One example of private efforts to prevent foreclosures is the HOPE NOW Alliance, a voluntary
alliance of mortgage servicers, lenders, investors, counseling agencies, and others that formed in
October 2007.72 The alliance is a private sector initiative created with the encouragement of the
federal government to engage in active outreach efforts to troubled borrowers. Member
organizations identify borrowers who may have difficulty making loan payments before they
become seriously delinquent on their mortgages, and work with such borrowers to work out loan
modifications or repayment plans that can keep the borrowers in their homes.
HOPE NOW Alliance members have undertaken several initiatives to help troubled homeowners.
One such initiative the alliance has supported is a hotline, operated by the Homeownership
Preservation Foundation, that connects borrowers to HUD-approved housing counselors who can
help homeowners contact their servicers and work out a plan to avoid foreclosure. The hotline

71 The Pew Charitable Trusts Center on the States, Defaulting on the Dream: States Respond to America’s Foreclosure
Crisis
, April 2008, http://www.pewcenteronthestates.org/uploadedFiles/
PCS_DefaultingOnTheDream_Report_FINAL041508_01.pdf.
72 For a full list of current members of the HOPE NOW Alliance, see the HOPE NOW website at
https://www.hopenow.com/members.php.
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serves as a first point of contact for troubled borrowers, and both HUD and non-profit
organizations such as NeighborWorks America advocate its use.73
According to HOPE NOW’s own reports, the alliance’s members had executed close to 900,000
loan modifications in 2011 as of October 2011.74 This number includes both modifications
completed through the Home Affordable Modification Program (HAMP) and through servicers’
proprietary programs. It does not include repayment plans or other types of workouts. (Under a
repayment plan, it is possible that some borrowers could end up with higher, not lower, monthly
payments. Therefore, in some cases repayment plans may not substantially reduce the risk that the
assisted homeowners will eventually end up in default or foreclosure.) HOPE NOW also reports
that the industry has completed a total of about 5 million mortgage modifications since 2007,
including both HAMP and proprietary modifications.75
Other Foreclosure Prevention Proposals
Some observers argue that the programs outlined above, which have already been implemented
by various government and private organizations, have not been effective enough at stopping the
rising foreclosure rate and keeping people in their homes. This section briefly outlines some
existing proposals for further action to help prevent foreclosures.
Changing Bankruptcy Law
One method that has been suggested to help more homeowners remain in their homes is to amend
bankruptcy law to allow a judge to order a mortgage loan modification as part of a bankruptcy
proceeding. Bankruptcy judges currently have the authority to modify or reduce other types of
outstanding debt obligations, including mortgages on second homes and vacation homes, but this
authority does not extend to mortgages on primary residences. Opponents of such a change do not
want judges to have such broad power to amend a contract after the fact. They argue that allowing
these “cramdowns” would make lenders more hesitant to make mortgage loans in the future,
since the threat of a loan being modified in this way could make mortgage lending more risky.
Supporters of amending bankruptcy law say that, in addition to helping a borrower in bankruptcy
avoid foreclosure through a court-mandated loan modification, such a change might also
encourage lenders to work with borrowers to modify loans before the bankruptcy process begins
in the first place.
During the 111th Congress, provisions to amend bankruptcy law to allow judges to modify
mortgages on primary residences were included in H.R. 1106, the Helping Families Save Their
Homes Act of 2009, which passed the House on March 5, 2009. However, bankruptcy provisions
were not included in the Senate’s version of the bill, S. 896, which passed the Senate on May 6,
2009. A modified version of the Senate bill was signed into law (P.L. 111-22) on May 20, 2009,
without the cramdown provision. (For a description of some legislative proposals to amend

73 The phone number for the HOPE NOW Alliance hotline is 888-995-HOPE (4673).
74 The HOPE NOW Alliance, “Total Loan Mods for 2011 Nearing the One Million Mark,” press release, December 7,
2011, http://hopenow.com/news/Total_Loan_Mods.pdf.
75 The HOPE NOW Alliance, “Five Million Loan Mods Since 2007,” press release, November 15, 2011,
http://hopenow.com/press_release/files/Sept%202011%20Data_5M%20Mods_FINAL.pdf.
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bankruptcy law to allow judges to order mortgage modifications, see CRS Report RL34301, The
Primary Residence Exception: Legislative Proposals in the 111th Congress to Amend the
Bankruptcy Code to Allow the Strip Down of Certain Home Mortgages
, by David H. Carpenter.)
Foreclosure Moratorium
Some advocates have called for placing a temporary moratorium on foreclosure completions.
Proponents of this idea argue that placing a freeze on foreclosure completions would give
homeowners and lenders more time to work out sustainable loan modifications that would allow
homeowners to remain in their homes and turn troubled mortgages back into performing loans
that benefit the lenders. Opponents of a foreclosure moratorium argue that the government should
not interfere with the right of a lender to complete foreclosure proceedings against a borrower
who has defaulted on his or her loan. They note that delaying foreclosure proceedings through a
foreclosure moratorium could result in greater losses for the lender if the ultimate outcome is still
a foreclosure and the home’s price has fallen further in the interim. (For an analysis of the
economic principals behind a foreclosure moratorium, see CRS Report RL34653, Economic
Analysis of a Mortgage Foreclosure Moratorium
, by Edward V. Murphy.) Fannie Mae, Freddie
Mac, and some private lenders have periodically instituted temporary foreclosure moratoria for
mortgages they that they own to allow time for foreclosure prevention programs to be put into
place or for other reasons.
Issues and Challenges Associated with
Preventing Foreclosures

There are several challenges associated with designing successful programs to prevent
foreclosures. Some of these challenges are practical and concern issues surrounding the
implementation of loan modifications. Other challenges are more conceptual, and are related to
questions of fairness and precedent. This section describes some of the most prominent
considerations involved in programs to preserve homeownership.
Who Has the Authority to Modify Mortgages?
In recent years, the practice of lenders packaging mortgages into securities and selling them to
investors has become more widespread. This practice is known as securitization, and the
securities that include the mortgages are known as mortgage-backed securities (MBS). When
mortgages are sold through securitization, several players become involved with any individual
mortgage loan, including the lender, the servicer, and the investors who hold shares in the MBS.
The servicer is usually the organization that has the most contact with the borrower, including
receiving monthly payments and initiating any foreclosure proceedings. However, servicers are
usually subject to contracts with investors which limit the activities that the servicer can
undertake and require it to safeguard the investors’ profit. One major question that has faced
foreclosure prevention programs, therefore, is who actually has the authority to make a loan
modification. Contractual obligations may limit the amount of flexibility that servicers have to
modify loans in ways that could arguably yield a lower return for investors. In some cases, loan
modifications can result in less of a loss for investors than foreclosure; however, servicers may
not want to risk having investors challenge their assessment that a modification is more cost-
effective than a foreclosure. This problem can be especially salient in streamlined programs in
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which large numbers of loans are modified at once. With such streamlined programs, the cost-
effectiveness of loan modifications depends on questions such as how many loans would have
likely ended up in foreclosure without the modification, making it more difficult to say whether
wholesale loan modifications are in the best interest of investors.
One possible way to partially address the question of who can modify mortgages is to provide a
safe harbor for servicers. In general, a safe harbor protects servicers who engage in certain
mortgage modifications from lawsuits brought by investors. While proponents of a safe harbor
believe that a safe harbor is necessary to encourage servicers to modify more mortgages without
fear of legal repercussions, opponents argue that a safe harbor infringes on investors’ rights and
could even encourage servicers to modify mortgages that are not in trouble if it benefits their own
self-interest. P.L. 111-22, the Helping Families Save Their Homes Act of 2009, provides a safe
harbor for servicers who modify mortgages consistent with the Making Home Affordable
program guidelines or who used the since-expired Hope for Homeowners program. The
legislation specifies that the safe harbor does not protect servicers or individuals from liability for
any fraud committed in their handling of the mortgage or the mortgage modification.
Volume of Delinquencies and Foreclosures
Another issue facing loan modification programs is the sheer number of delinquencies and
foreclosure proceedings underway. Lenders and servicers have a limited number of employees to
reach out to troubled borrowers and find solutions. Contacting borrowers—some of whom may
avoid contact with their servicer out of embarrassment or fear—and working out large numbers of
individual loan modifications can overwhelm the capacity of the lenders and servicers who are
trying to help homeowners avoid foreclosure. Streamlined plans that use a formula to modify all
loans that meet certain criteria may make it easier for lenders and servicers to help a greater
number of borrowers in a shorter amount of time. However, streamlined plans are more likely to
run into the contractual issues between servicers and investors described above.
Servicer Incentives
Mortgage servicers are the entities that are often primarily responsible for making the decision to
modify a mortgage or to begin the foreclosure process. Concerns have been raised that mortgage
servicers’ compensation structures may provide incentives for them to pursue foreclosure rather
than modify loans in certain cases. Servicers’ actions are governed by contracts with mortgage
holders or investors that generally require servicers to act in the best interests of the entity on
whose behalf they service the mortgages, although, as described above, such contracts may in
some cases also include restrictions on servicers’ abilities to modify loans. In addition to their
contractual obligations, servicers have an incentive to service mortgages in the best interest of
investors because that is one way that mortgage servicers ensure that they will attract continued
business. However, some have suggested that servicers’ compensation structures may provide
incentives for servicers to pursue foreclosure even when it is not in the best interest of the
investor in the mortgage. For example, servicers’ compensation structures may not provide an
incentive to put in the extra work that is necessary to modify a mortgage, and servicers may be
able to charge more in fees or recoup more expenses through a foreclosure than a modification.
Programs such as HAMP provide financial payments to servicers to modify mortgages, but critics
argue that these may not be large enough to align servicers’ incentives with those of borrowers
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and investors.76 Recently, the Federal Housing Finance Agency (FHFA) and HUD have
announced a joint initiative to consider alternative servicer compensation structures, although any
changes would not take effect until at least 2012.77
For more information on the incentives facing mortgage servicers and legislative proposals to
implement national mortgage servicing standards, see CRS Report R42041, National Mortgage
Servicing Standards: Legislation in the 112th Congress
, by Sean M. Hoskins.
Possibility of Re-default
Another major challenge associated with loan modification programs is the possibility that a
homeowner who receives a modification will nevertheless default on the loan again in the future.
This possibility is especially problematic if the home’s value is falling, because in that case
delaying an eventual foreclosure reduces the value that the lender can recoup through a
foreclosure sale. Data released quarterly by the Office of the Comptroller of the Currency (OCC)
track the re-default rates of modified mortgages. Data from the third quarter of 2011 show that
23.5% of loans modified in the second quarter of 2010 were 30 or more days delinquent again
three months after the modification, 33% were 30 or more days delinquent six months after the
modification, and 37% were 30 or more days delinquent 12 months after the modification. The
same data show that a smaller percentage of modified loans were 60 or more days delinquent:
almost 11% of loans were 60 or more days delinquent three months after the modification, almost
20% were 60 or more days delinquent six months after the modification, and nearly 26% were 60
or more days delinquent 12 months after the modification.78 Earlier reports from the OCC showed
that mortgages modified in earlier quarters tended to have higher re-default rates; the decrease in
redefault rates for loans modified in more recent quarters may have to do with an increased focus
on modifications that reduce borrowers’ monthly payments.
The OCC has begun to include data in its quarterly report that show re-default rates according to
whether the loan modification increased monthly payments, decreased monthly payments, or left
monthly payments unchanged. The reports include such data for loans modified since the
beginning of 2008. The third quarter 2011 report shows that, for loans modified in 2010, about
17% of loan modifications that resulted in monthly payments being reduced by 20% or more
were 60 or more days delinquent twelve months after modification. This compares to a re-default
rate of nearly 30% for loans where monthly payments were reduced by between 10% and 20%;
about 37% for loans where payments were reduced by less than 10%; about 25% for loans where
payments remained unchanged; and nearly 45% for loans where monthly payments increased.
While loan modifications that lower monthly payments do appear to perform better than
modifications that increase monthly payments or leave them unchanged, a significant number of

76 For one discussion of the economics of mortgage servicing, see Section 3 of the Special Inspector General for the
Troubled Asset Relief Program (SIGTARP) Quarterly Report to Congress, October 26, 2010, available at
http://www.sigtarp.gov/reports/congress/2010/October2010_Quarterly_Report_to_Congress.pdf.
77 Federal Housing Finance Agency, “FHFA Announces Joint Initiative to Consider Alternatives for a New Mortgage
Servicing Compensation Structure,” press release, January 18, 2011, available at http://fhfa.gov/webfiles/19639/
Servicing_model11811.pdf.
78 Office of the Comptroller of the Currency and Office of Thrift Supervision, OCC and OTS Mortgage Metrics
Report: Disclosure of National Bank and Federal Thrift Mortgage Loan Data, Third Quarter 2011
, December 21,
2011, pp. 32-33, http://occ.gov/publications/publications-by-type/other-publications-reports/mortgage-metrics-2011/
mortgage-metrics-q3-2011.pdf.
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modified loans with lower monthly payments still become delinquent again after the loan
modification.79
The OCC also reports that HAMP modifications appear to perform somewhat better than other
types of modifications, possibly because of HAMP’s focus on reducing monthly mortgage
payments. For example, they report that about 13% of HAMP modifications completed in the
second quarter of 2010 were 60 or more days delinquent six months later, while about 24% of
other modifications from the same period were 60 or more days delinquent six months later.80
Treasury’s own data on the performance of HAMP modifications also show somewhat lower
levels of re-default than are seen for other types of mortgage modifications to date. As of
September 2011, Treasury reported that about 10% of permanent HAMP modifications were 60
or more days delinquent six months after modification, and about 19% of HAMP modifications
were 60 or more days delinquent 12 months after modification.81
Distorting Borrower Incentives
Another challenge is that loan modification programs may provide an incentive for borrowers to
intentionally miss payments or default on their mortgages in order to qualify for a loan
modification that provides more favorable mortgage terms. While many of the programs
described above specifically require that a borrower must not have intentionally missed payments
on his or her mortgage in order to qualify for the program, it can be difficult to prove a person’s
intention. Programs that are designed to reach out to distressed borrowers before they miss any
payments, as well as those who are already delinquent, may minimize the incentive for
homeowners to intentionally fall behind on their mortgages in order to receive help.
Fairness Issues
Opponents of some foreclosure prevention plans argue that it is not fair to help homeowners who
have fallen behind on their mortgages while homeowners who have been scraping by to stay
current receive no help. Others argue that borrowers who got in over their heads, particularly if
they intentionally took out mortgages that they knew they could not afford, should face
consequences. Supporters of loan modification plans point out that many borrowers go into
foreclosure for reasons outside of their control, and that some troubled borrowers may have been
victims of deceptive, unfair, or fraudulent lending practices. Furthermore, some argue for
foreclosure prevention programs because foreclosures can create problems for other homeowners
in the neighborhood by dragging down property values or putting a strain on local governments.
To address these concerns about fairness, some loan modification programs reach out to
borrowers who are struggling to make payments but are not yet delinquent on their mortgages.
Most programs also specifically exclude individuals who provided false information in order to
obtain a mortgage.

79 Ibid., p. 39.
80 Ibid., p. 37.
81 U.S. Department of the Treasury, Making Home Affordable Program Servicer Performance Report Through
September 2011
, November 3, 2011, p. 3, http://www.treasury.gov/initiatives/financial-stability/results/MHA-Reports/
Documents/Sept%202011%20MHA%20Report_Final.pdf .
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Precedent
Some opponents of government efforts to provide or encourage loan modifications argue that
changing the terms of a contract retroactively sets a troubling precedent for future mortgage
lending. These opponents argue that if lenders believe that they could be forced to change the
terms of a mortgage in the future, they will be less likely to provide mortgage loans in the first
place or will only do so at higher interest rates to counter the perceived increase in the risk of not
being repaid in full. Most existing programs attempt to address this concern by limiting the
program’s scope. Often, these programs apply only to mortgages that originated during a certain
time frame, and end at a pre-determined date.

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Appendix A. Comparison of Recent Federal Foreclosure Prevention Initiatives

Table A-1. Comparison of Select Federal Foreclosure Prevention Programs
Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Program Basics
Status
Created by P.L. 110-
Obama
Obama Administration
Obama Administration
Obama Administration
289.
Administration
initiative.
initiative.c
initiative to modify

initiative.
HAMP.
Modified by P.L. 111-
22.
Began on October 1,
Announced March 26,
Announced February
Announced February
Announced March 26,
2008.
2010; active since
2009; active since April
2009; active since March 2010; active since
September 7, 2010.
1, 2009.
4, 2009.
October 1, 2010.
Ended on September
Available until
Available until
Available until
Same as HAMP.
30, 2011.
December 31, 2012.
December 31, 2013.
December 31, 2012.
762 loans refinanced
499 loans had
962,132 loans had been
80,223 HAMP trial
15,875 trial PRA
through the program.
refinanced through
refinanced through
modifications and
modifications and
the program as of
HARP as of October
750,748 HAMP
36,454 permanent PRA
November 2011.
2011.
permanent
modifications were
modifications were
active as of November

active as of November
2011.
2011.
CRS-38


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Basic Premise
Allowed certain
Allows certain
Allows certain
Provides incentives to
Expansion of HAMP to
homeowners who owe homeowners who are
homeowners who are
servicers to modify
facilitate principal
more than their homes
current on their
current on their
borrowers’ mortgages
reductions on eligible
were worth to
mortgages, but owe
mortgages, but owe
so that monthly
mortgages.
refinance into new,
more than their
between over 80% of
mortgage payments are
FHA-insured
homes are worth, to
what their homes are
no more than 31% of
mortgages.
refinance into new,
worth, and whose
gross monthly income.
FHA-insured
mortgages are owned
mortgages.
or guaranteed by Fannie
Mae or Freddie Mac, to
refinance into new, non-
FHA insured mortgages.
Reduced principal
Reduces principal
Does not reduce
Principal reduction is
Requires participating
balance on first
balance on the first
principal.
allowed at servicer’s
HAMP servicers to
mortgage; maximum
mortgage to no more
discretion, but not
consider reducing
loan-to-value (LTV)
than 97.75% of the
required or specifically
principal for eligible
ratio of new loan
home’s value. The first
incentivized.
borrowers who owe
depended on
mortgage must be
over 115% of the value
borrower’s
reduced by at least
of their home.
circumstances.
10%.
Provides incentives to
lenders/investors
specifically for reducing
principal.
Second liens had to be
Second liens are
Second liens are allowed Second liens are allowed Increases incentive
extinguished.
allowed to remain;
to remain; they must be
to remain; they must be
payments available
they must be re-
re-subordinated.
re-subordinated, and
through the HAMP
subordinated, and
the Second Lien
Second Lien
total mortgage debt
Modification Program
Modification Program.
after the refinance
provides incentives for
may not exceed 115%
modification or
of the home’s value.
extinguishment of
second liens.
CRS-39


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Program Details
Program Details
Borrower refinanced
Borrower refinances
Borrower can refinance
Servicers receive
Requires servicers who
into FHA-insured
into FHA-insured
into a new, non-FHA
incentives to reduce
are participating in
mortgage with a lower
mortgage for no more insured loan. The
eligible borrowers’
HAMP to consider
principal mortgage
than 97.75% of home’s refinanced loan will not
mortgage payments to
principal reduction for
amount. Original
value. Original
reduce the principal
38% of gross monthly
borrowers who owe at
mortgage holder
mortgage holder
balance owed, but it can
income. Servicer can
least 115% of the value
absorbed loss resulting
absorbs loss resulting
reduce the interest rate
reduce payments
of their homes.
from write-down in
from write-down in
or move the borrower
through interest rate
mortgage value.
mortgage value.
from an adjustable-rate
reductions, term
to a fixed-rate
extensions, and principal
mortgage, thereby
forbearance, and may
lowering monthly
reduce principal at their
payments or preventing
own discretion.
a payment increase.
Government shares half

the cost of further
reducing payments to
31% of monthly income.
New mortgage amount New mortgage
New mortgage, like the
Because the outstanding
Same as HAMP.
could not exceed
amount may not
original mortgage,
principal balance cannot
$550,440 (for a one-
exceed FHA
cannot exceed Fannie
exceed $729,750 (for a
unit home).
maximum loan limits.
Mae/Freddie Mac
one-unit home) to
conforming loan limits.
participate in HAMP,
the principal balance of
loans modified through
HAMP will necessarily
not exceed this amount.
CRS-40


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
New mortgage had to
New total monthly
The new mortgage must The new mortgage
Same as HAMP.
result in a lower
mortgage payment
benefit the homeowner
payment must not
monthly mortgage
(including second
through a lower interest exceed 31% of gross
If principal is reduced,
payment than the
mortgage payments)
rate or a more stable
monthly income.
the amount of principal
original loan, but there
must be no higher
mortgage product (for
reduction will initially be
was no minimum
than approximately
example, a fixed-rate
Borrowers must
treated as principal
reduction in payment.
31% of income.
loan instead of an
successfully complete a
forbearance, and then
adjustable-rate loan).
three-month trial period will be forgiven in three
Maximum loan-to-value New mortgage must
before the modification
equal parts over three
ratios and total debt-
result in a reduction
Borrowers without
becomes permanent.
years as long as the
to-income ratios
of mortgage debt of at mortgage insurance (MI)
borrower remains
depended on the
least 10% of the
on the original loan are

current.
borrower’s
amount of the original
not required to get MI
delinquency status and
outstanding principal
on the new loan.
credit score.d
balance, and must not
exceed 97.75% of the
home’s value.
Total household debt
may not be more than
approximately 50% in
most cases.
Borrower paid upfront
Borrower pays
If the mortgage already
Mortgages may or may
Same as HAMP.
and annual FHA
upfront and annual
had MI, that MI should
not have MI.
mortgage insurance
FHA mortgage
be transferred to the
premiums.e
insurance premiums.
new loan.
Borrower pays “exit
premium” when the
home is sold.f
CRS-41


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Second lien-holders
Allows for existence
Second liens are not
Second Lien
Second Lien
had to release their
of a second lien up to
explicitly addressed.
Modification Program
Modification Program
liens.
a total combined
provides incentives for
still applies; incentives
mortgage debt of
the modification or
will be increased.
115% of home’s value.
extinguishment of
If the second lien is
Second Liens.
not extinguished, the
second lien-holder
must agree to re-
subordinate the lien.
Incentives for
HUD had authority to
No incentive
No incentive payments.
Incentives to servicers
Incentives offered to
Lenders/Servicers/Investors
provide incentive
payments related to
for making
lenders/investors based
payments to mortgage
first lien mortgage.
modifications.
on the dollar amount of
servicers and
“Pay-for-success”
principal reduced.
originators of new
incentives to borrowers
H4H mortgages.

and servicers if

borrowers remain
current.
Incentives to
lenders/investors in the
form of half the cost of
reducing the monthly
mortgage payment from
38% to 31% of gross
monthly income.
Incentive payments
Incentives will be
No incentive payments.
Incentives are offered
Incentives will be
could be made to
made to second lien-
for second lien-holders
increased for second
second lien-holders to
holders to write down
to modify or release
lien-holders to write
facilitate the
the balance of the
their liens through the
down the balance of the
extinguishment of the
second lien.
Second Lien Program.
second lien.
lien.
CRS-42


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Performance of H4H
Performance of short
No additional
Additional incentives
Additional HAMP
mortgages were not be refinances will not be
incentives.
are available for
incentives continue to
included in certain
included in certain
investors, borrowers,
apply.
FHA evaluations of
FHA evaluations of
lenders, and servicers
lenders’ performance.
lenders’ performance.
for certain other
modification or
foreclosure prevention
activities.
Eligibility Requirements
Borrower/Mortgage Eligibility
Borrower could have
Borrower must have a Borrower must have a
Borrower must have a
Same as HAMP.
an FHA-insured or
non-FHA-insured
mortgage that is owned
mortgage held by any
Requirements
non-FHA-insured
mortgage.
or guaranteed by Fannie
participating lender or
mortgage.g
Mae or Freddie Mac.
servicer.h
Borrower could be
Borrower must be
Borrower must be
Borrower may be
Same as HAMP.
current or delinquent
current on his/her
current on his/her
current or delinquent
on his/her mortgage.
mortgage.
mortgage.
on his/ her mortgage.
Borrower must have
No hardship
No hardship
Borrower must have
Same as HAMP.
experienced a financial
requirement.
requirement.
experienced a financial
hardship.
hardship.
CRS-43


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Borrower’s total
No minimum monthly
Borrower owes
Borrower’s total
Same as HAMP.
monthly mortgage
mortgage payment
between 80% and 125%
monthly mortgage
payment must have
specified.
of the value of the
payment must be higher
Borrower must owe at
been higher than 31%
home.i
than 31% of gross
least 115% of the value
of gross monthly
monthly income.
of the home before
income.
servicers are required
Borrower must not
to consider principal
Borrower’s net worth
have sufficient liquid
reductions.
could not be greater
assets to make monthly
than $1 million.
mortgage payments.
The unpaid principal
balance is no higher
than $729,750 (for a
one-unit property). This
is the Fannie
Mae/Freddie Mac
conforming loan limit
for high-cost areas.
Mortgage must have
No mortgage
Mortgage must generally Mortgage must have
Same as HAMP.
been originated on or
origination criteria
have been delivered to
been originated on or
before January 1, 2008.
specified.
Fannie Mae or Freddie
before January 1, 2009.
Mac during or before
the early months of

2009, but the actual
dates depend on
whether the loan is
owned or guaranteed by
Fannie or Freddie.
Property Eligibility
Home must have been
Home must be the
Home not required to
Home must be the
Same as HAMP.
the borrower’s
borrower’s primary
be primary residence.
borrower’s primary
Requirements
primary residence.
residence.
residence.
Property must have
Property must be
Property must be single-
Property must be single-
Same as HAMP.
been single-family (1-4
single-family (1-4 unit)
family (1-4 unit) home.
family (1-4 unit) home.
unit) home.j
home.
CRS-44


Refinancing Programs
Modification Programs
Home Affordable
Hope for
Home Affordable
Modification
HAMP—
Homeowners
FHA Short
Refinance Program
Program (HAMP)—
Principal Reduction

(H4H)
Refinance Program
(HARP)a
Original
Alternativeb
Lender/Servicer Participation
Mortgage holders
Mortgage holders
Fannie Mae- and Freddie Servicers who have
Servicers who have
agreed to accept
agree to accept
Mac-approved lenders
signed HAMP
signed HAMP
proceeds of new loan
proceeds of new loan
are authorized to
participation
participation agreements
as payment in full on
as payment in full on
participate.
agreements are
are required to
the original loan, and
the original loan, and
required to participate;
participate in the
FHA-approved lenders
FHA-approved
signing a participation
program changes.
agreed to make new
lenders agree to make
agreement is voluntary.
H4H loans, on a case-
new FHA-insured

by-case basis.
loans, on a case-by-
case basis.
Sources: FHA Mortgagee Letter 2009-43; FHA Mortgagee Letter 2010-23; Fact Sheet on FHA Program Adjustments to Support Refinancings for Underwater
Homeowners; Fact Sheet on Making Home Affordable Program Enhancements to Offer More Help for Homeowners; FHA Outlook, February 2010; FHFA Foreclosure
Prevention and Refinance Report, November 2009/January 2010; Making Home Affordable Program: Servicer Performance Reports; Home Affordable Modification Program
Guidelines; HAMP Supplemental Directive 09-01; Fannie Mae and Freddie Mac HARP guidance.
a. Fannie Mae and Freddie Mac have each issued their own specific guidelines for HARP.
b. Treasury’s detailed guidance on HAMP, including the Principal Reduction Alternative and other related programs, can be found in the Making Home Affordable
handbook, available at https://www.hmpadmin.com/portal/index.jsp.
c. While HAMP was created as an Obama Administration initiative, the funding for the program is provided through the Troubled Assets Relief Program (TARP). TARP
was authorized in P.L. 110-343.
d. FHA Mortgagee Letter 2009-43. The maximum allowable LTV has changed since the program was first created.
e. Using statutory authority provided in P.L. 111-22, HUD has reduced the mortgage insurance premiums for H4H from their original levels.
f.
Borrowers originally had to agree to share a portion of both their equity in the home and any house price appreciation with HUD when the home was eventually sold.
P.L. 111-22 provided the authority to change these requirements. The exit premium is now a payment of a portion of the initial equity in the home after the H4H
refinance.
g. FHA Mortgagee Letter 2009-43. When the program first began, only non-FHA-insured loans were eligible.
h. FHA-insured mortgages are eligible for FHA-HAMP, an FHA loss mitigation activity that shares many of the same features as HAMP. VA or USDA mortgages may or
may not be eligible for HAMP, subject to the relevant agency’s guidance.
i.
Originally, HARP allowed homeowners to refinance if they owed up to 105% of the value of their homes. On July 1, 2009, the Federal Housing Finance Agency (FHFA)
announced that it would increase the maximum loan-to-value ratio to 125%.
j.
FHA Mortgagee Letter 2009-43. When the program first began, only 1-unit properties were eligible.
CRS-45

Preserving Homeownership: Foreclosure Prevention Initiatives

Appendix B. Earlier Foreclosure Prevention
Programs

Prior to the creation of the more recent foreclosure prevention programs described earlier in this
report, several other foreclosure prevention programs were created or announced. Many of these
programs were precursors to the programs that are in place today. This Appendix describes some
of these programs, including FHASecure, Fannie Mae’s and Freddie Mac’s Streamlined
Modification Program, and the FDIC’s program for modifying loans that had been held by
IndyMac Bank. Most of these programs are no longer active; exceptions are noted in the text.
FHASecure
FHASecure was a temporary program announced by the Federal Housing Administration (FHA)
on August 31, 2007, to allow delinquent borrowers with non-FHA adjustable-rate mortgages
(ARMs) to refinance into FHA-insured fixed-rate mortgages.82 The new mortgage helped
borrowers by offering better loan terms that either reduced a borrower’s monthly payments or
helped a borrower avoid steep payment increases under his or her old loan. FHASecure expired
on December 31, 2008.
To qualify for FHASecure, borrowers originally had to meet the following eligibility criteria:
• The borrower had a non-FHA ARM that had reset.
• The borrower became delinquent on his or her loan due to the reset, and had
sufficient income to make monthly payments on the new FHA-insured loan.
• The borrower was current on his or her mortgage prior to the reset. (Some
borrowers with a minimum amount of equity in their homes could still be eligible
for the program even if they had missed payments prior to the reset.)
• The new loan met standard FHA underwriting criteria and was subject to other
standard FHA requirements (including maximum loan-to-value ratios, mortgage
limits, and up-front and annual mortgage insurance premiums).
In July 2008, FHA expanded its eligibility criteria for the program, and borrowers had to meet the
following revised eligibility requirements:
• The borrower became delinquent on his or her non-FHA ARM because of an
interest rate reset or another extenuating circumstance, and had sufficient income
to make monthly payments on the new FHA-insured loan.
• The borrower had no more than two payments that were 30 days late, or one
payment that was 60 days late, in the 12 months preceding the interest rate reset
or other extenuating circumstance.
• If the loan-to-value ratio on the FHA-insured mortgage was no higher than 90%,
the borrower may have had no more than three payments that were 30 days late,

82 FHA already offered refinancing options for homeowners who were current on their existing fixed- or adjustable-rate
mortgages and continued to do so after the adoption of FHASecure.
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Preserving Homeownership: Foreclosure Prevention Initiatives

or one payment that was 90 days late, prior to the interest rate reset or other
extenuating circumstance.
• Borrowers with interest-only ARMs or option ARMs must have been delinquent
due to an interest rate reset only (and not other extenuating circumstances), and
must have been current on their mortgages prior to the reset; the revised
eligibility criteria did not apply to these borrowers.
• The new loan met standard FHA underwriting criteria and was subject to other
standard FHA requirements (including maximum loan-to-value ratios, mortgage
limits, and up-front and annual mortgage insurance premiums).
FHASecure expired on December 31, 2008. In the months before its expiration, some housing
policy advocates called for the program to be extended; however, HUD officials contended that
continuing the program would be prohibitively expensive, possibly endangering FHA’s single-
family mortgage insurance program. HUD also pointed to the Hope for Homeowners program as
filling the role that FHASecure did in helping households avoid foreclosure.83 Supporters of
extending FHASecure argued that the statutory requirements of Hope for Homeowners may have
offered less flexibility in the face of changing circumstances than FHASecure, which could have
been more easily amended by HUD.
When FHASecure expired at the end of 2008, about 4,000 loans had been refinanced through the
program.84 Critics of the program point to the relatively stringent criteria that borrowers had to
meet to qualify for the program as a possible reason that more people did not take advantage of it.
IndyMac Loan Modifications
On July 11, 2008, the Office of Thrift Supervision in the Department of the Treasury closed
IndyMac Federal Savings Bank, based in Pasadena, CA, and placed it under the conservatorship
of the Federal Deposit Insurance Corporation (FDIC). In August 2008, the FDIC put into place a
loan modification program for holders of mortgages either owned or serviced by IndyMac that
were seriously delinquent or in danger of default, or on which the borrower was having trouble
making payments because of interest rate resets or a change in financial circumstances.
The IndyMac program offered systematic loan modifications to qualified borrowers in financial
trouble. The systematic approach means that all loan modifications follow the same basic formula
to identify qualified borrowers and reduce their monthly payments in a uniform way. Such an
approach is meant to allow more modifications to happen more quickly than if each loan was
modified on a case-by-case basis.
In order to be eligible for a loan modification, the mortgage must have been for the borrower’s
primary residence and the borrower had to provide current income information that documented
financial hardship. Furthermore, the FDIC conducted a net present value test to evaluate whether
the expected future benefit to the FDIC and the mortgage investors from modifying the loan
would be greater than the expected future benefit from foreclosure.

83 HUD Mortgagee Letter 08-41, “Termination of FHASecure,” December 19, 2008, available at http://www.hud.gov/
offices/adm/hudclips/letters/mortgagee/2008ml.cfm.
84 Congressional Budget Office, “The Budget and Economic Outlook: Fiscal Years 2009 to 2019,” January 2009,
available at http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf.
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Preserving Homeownership: Foreclosure Prevention Initiatives

If a borrower met the above conditions, the loan would be modified so that he or she had a
mortgage debt-to-income (DTI) ratio of 38%. The 38% DTI could be achieved by lowering the
interest rate, extending the period of the loan, forbearing a portion of the principal, or a
combination of the three. The interest rate would be set at the Freddie Mac survey rate for
conforming mortgages, but if necessary it could be lowered for a period of up to five years in
order to reach the 38% DTI; after the five-year period, the interest rate would rise by no more
than 1% each year until it reached the Freddie Mac survey rate.
FDIC Chairman Sheila Bair estimated that about 13,000 loans were modified under this program
while IndyMac was under the FDIC’s conservatorship.85 The FDIC completed a sale of IndyMac
to OneWest Bank on March 19, 2009. OneWest agreed to continue to operate the loan
modification program subject to the terms of a loss-sharing agreement with the FDIC.86 Currently,
OneWest is a participating servicer in HAMP, described earlier in this report.
Fannie Mae and Freddie Mac Streamlined Modification Plan
On November 11, 2008, James Lockhart, then the director of the Federal Housing Finance
Agency (FHFA), which oversees Fannie Mae and Freddie Mac, announced a new Streamlined
Modification Program that Fannie, Freddie, and certain private mortgage lenders and servicers
planned to undertake.87 Fannie Mae and Freddie Mac had helped troubled borrowers through
individualized loan modifications for some time, but the SMP represented an attempt to formalize
the process and set an industry standard. The SMP took effect on December 15, 2008, but has
since been replaced by the Making Home Affordable plan, announced in February 2009 and
described in an earlier section of this report.
In order for borrowers whose mortgages were owned by Fannie Mae or Freddie Mac to be
eligible for the SMP, they had to meet the following criteria:
• The mortgage must have originated on or before January 1, 2008.
• The mortgage must have had a loan-to-value ratio of at least 90%.
• The home must have been a single-family residence occupied by the borrower,
and it must have been the borrower’s primary residence.
• The borrower must have missed at least three mortgage payments.
• The borrower must not have filed for bankruptcy.
Mortgages insured or guaranteed by the federal government, such as those guaranteed by FHA,
the Veterans’ Administration, or the Rural Housing Service, were not eligible for the SMP.

85 Remarks by FDIC Chairman Sheila Bair to the National Association of Realtors Midyear Legislative Meeting and
Trade Expo, Washington, DC, May 12, 2009. A transcript of these remarks is available at http://www.fdic.gov/news/
news/speeches/archives/2009/spmay1209.html.
86 Federal Deposit Insurance Corporation, “FDIC Closes Sale of IndyMac Federal Bank, Pasadena, California,” press
release, March 19, 2009, http://www.fdic.gov/news/news/press/2009/pr09042.html.
87 The private mortgage lenders and servicers who participated in the Streamlined Modification Program were
primarily members of the HOPE NOW Alliance, a voluntary alliance of industry members that formed to help
homeowners avoid foreclosure. The HOPE NOW Alliance is described in detail in an earlier section of this report.
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Preserving Homeownership: Foreclosure Prevention Initiatives

The SMP shared many features of the FDIC’s plan to modify troubled mortgages held by
IndyMac. Borrowers who qualified for the program had to provide income information that was
current within the last 90 days to the mortgage servicer. Based on this updated income
information, borrowers’ monthly mortgage payments were lowered so that the household’s
mortgage debt-to-income ratio (DTI) was 38% (not including second lien payments). After
borrowers successfully completed a three-month trial period (by making all of the payments at the
proposed modified payment amount), the loan modification automatically took effect.
In order to reach the 38% mortgage debt-to-income ratio, servicers were required to follow a
specific formula. First, the servicer capitalized late payments and accrued interest (late fees and
penalties were waived). If this resulted in a DTI of 38% or less, the modification was complete. If
the DTI was higher than 38%, the servicer could extend the term of the loan to up to 40 years
from the effective date of the modification. If the DTI was still above 38%, the interest rate could
be adjusted to the current market rate or lower, but to no less than 3%. Finally, if the DTI was still
above 38% after the first three steps were taken, servicers could offer principal forbearance. The
amount of the principal forbearance would not accrue interest and was non-amortizing, but would
result in a balloon payment when the loan was paid off or the home was sold.
Negative amortization was not allowed under the SMP, nor were principal forgiveness or
principal write-downs. In order to encourage participation in the SMP, Fannie Mae and Freddie
Mac paid servicers $800 for each loan modification completed through the program. If the SMP
did not produce an affordable payment for the borrower, servicers were to work with borrowers in
a customized fashion to try to modify the loan in a way that the homeowner could afford.
Fannie Mae and Freddie Mac completed over 51,000 loan modifications between January 2009
and April 2009, when Fannie and Freddie stopped using the SMP and began participating in the
Making Home Affordable program instead.88 However, it is unclear how many of these loan
modifications were done specifically through the SMP.
Federal Reserve Homeownership Preservation Policy
On January 27, 2009, the Federal Reserve announced the Homeownership Preservation Policy.89
This plan provided guidelines, subject to Section 110 of the Emergency Economic Stabilization
Act of 2008 (EESA), to prevent foreclosures on any residential mortgages that the Federal
Reserve Banks might come to hold, own, or control, such as mortgage assets that they may
receive as collateral for lending to troubled banks.
In order to be eligible for a loan modification under the Homeownership Preservation Policy, a
borrower would have to be at least 60 days delinquent (although the Fed could make exceptions
for households experiencing circumstances that were likely to result in their becoming at least 60
days delinquent). If the expected net present value of a loan modification was greater than the
expected net present value of foreclosure, the Federal Reserve Banks could modify mortgages by
reducing the interest rate, extending the loan term, offering principal forbearance or principal
forgiveness, or changing other loan terms. The modified mortgage would have to have a fixed

88 Federal Housing Finance Agency, Foreclosure Prevention Report: April 2009, July 15, 2009, available at
http://www.fhfa.gov/webfiles/14588/April_Foreclosure_Prevention71509F.pdf.
89 Details of the Homeownership Preservation Policy can be found on the Federal Reserve’s website at
http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20090130a1.pdf.
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Preserving Homeownership: Foreclosure Prevention Initiatives

interest rate, a term of no more than 40 years, and result in a mortgage debt-to-income ratio of no
more than 38% for the borrower. The Fed must also have a reasonable expectation that the
borrower would be able to repay the modified loan. If the borrower’s mortgage debt was greater
than 125% of the current estimated value of the property, the Fed would prioritize principal
reductions over other types of loan modifications where possible.
This policy applied to whole mortgages that the Federal Reserve Banks held, owned, or
controlled. In the case of securitized mortgages in which the Fed had an interest, the Fed would
encourage servicers to undertake similar loan modifications and support their efforts to do so.

Author Contact Information


Katie Jones

Analyst in Housing Policy
kmjones@crs.loc.gov, 7-4162


Congressional Research Service
50