President Obama’s plan to stop foreclosure needs fixing.  The reason: Homeowners who are delinquent with their mortgages are being turned away from HAMP (Home Affordable Modification Program) because their mortgages are technically affordable by its standards.

HAMP is a $75 billion home loan modification initiative.  To make it easy for both lenders and borrowers to understand, eligibility is based on the ratio of a homeowners’ mortgage payment to their income. If the mortgage requires more than 31% of their paycheck, the loan is considered “unaffordable” and the borrower qualifies for the home loan modification, provided they meet the other conditions necessary.  If it requires less than 31%, they don’t qualify.  Many homeowners don’t qualify.

Loan providers criticize the formula, saying it is too narrow.  That it fails to consider other debts that borrowers have incurred, such as auto loans and credit card bills.  CitiMortgage and Ocwen, two of the largest lenders in the country both cite the formula as the leading cause of turning down borrowers from the home loan modification program.

It has been six months since HAMP began, and the government is only reporting slightly more than 200,000 homeowners enrolled; its goal is 4 million.  The incentives are there for both borrowers AND lenders, yet the numbers are low.

The wave of foreclosures began with bad lending to unqualified buyers.  Now with unemployment being 9.4% as of July, things are getting worse.  Real Estate values have dropped from the 2006 peak by one third, making for one in three homeowners upside down (owing more than the house is worth) in their mortgage.

Simply put, the HAMP formula isn’t working and needs to be modified itself.

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