In 2009, the federal government unveiled the Making Home Affordable program to help homeowners stay in their houses and avoid foreclosure. If your loan is owned or controlled by Freddie Mac or Fannie Mae, and you’re current on your mortgage, you may be able to refinance your mortgage into a fixed-rate, low-interest loan. And regardless of who owns your mortgage, if you are at risk of foreclosure and have suffered a change of circumstances beyond your control, you may be able to get your monthly mortgage payments reduced and your foreclosure proceedings suspended during the process.

The Making Home Affordable program has two primary components: the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP).

The Home Affordable Refinance Program

The Home Affordable Refinance Program was intended to transform millions of Fannie Mae and Freddie Mac loans into stable, 15- or 30-year fixed-rate, low-interest mortgages. Payments under the refinanced loans increased in some cases, if the homeowner could afford them. The tradeoff for higher payments in the short term was that the amounts were stable in the long term — no more worrying over interest rate resets. The refinance program applies only to mortgages owned or backed by Fannie Mae and Freddie Mac — about half of the nation’s mortgages.

Although the program was intended to significantly decrease the mortgage default rate and stabilize home prices, it has fallen short of expectations since it was announced two years ago. Of the four million to five million homeowners the plan was supposed to help, only 900,000 borrowers successfully refinanced through the program. As a result, in November 2011 the federal government announced changes to HARP that loosened the eligibility requirements in the hopes of helping more homeowners. The expanded program, known as “HARP 2,” should double the number of refinancings in the next two years.

To qualify for a refinance under HARP 2, you must meet the following eligibility requirements:

• Your loan is owned or guaranteed by Fannie Mae or Freddie Mac. (If you’re not sure whether Fannie Mae or Freddie Mac owns your mortgage, use the look-up tools at www.fanniemae.com/loanlookup and https://ww3.freddiemac.com/corporate.)
• Your loan was sold to Fannie Mae or Freddie Mac on or before May 31, 2009.
• You did not previously refinance your mortgage under HARP, unless you have a Fannie Mae loan and refinanced under HARP between March and May 2009.
• Your current loan-to-value (LTV) ratio is 80% or greater. (If you want to refinance into another adjustable-rate mortgage, the LTV ratio is capped at 105%. ARMs are allowed under HARP 2 so long as the initial interest rate is fixed for at least five years.)
• You are current on your mortgage.
• The mortgage you want refinanced secures your principal residence.

If you think you’re eligible for a HARP 2 refinance, contact your mortgage servicer. Because participation in HARP is optional, lenders may also impose additional eligibility requirements.

The HARP 2 refinancing program should be available through most lenders by mid-March 2012 and is set to expire on December 31, 2013.

The Home Affordable Modification Program

The Home Affordable Modification Program (HAMP) is intended to provide a workable way for all lenders to make mortgages more affordable in the short term by modifying the terms of the mortgage. The administration predicted that HAMP would benefit three million to four million homeowners, but only 670,000 borrowers have received permanent modifications so far.

You may qualify for this program if all of the following are true:

• Your loan is equal to or less than $729,750.
• The mortgage is on your principal residence.
• You are at risk of foreclosure, either because you have missed at least two payments or because your payments on your first mortgage exceed 31% of your gross income.
• You’ve experienced a financial hardship caused by a change of circumstances, such as loss of a job, medical emergency, or interest-rate reset.
• You can show (by way of a tax return and wage stubs) that you have enough steady income to make the payments under a modified loan.

The modification program’s ultimate goal is to adjust the interest rate and possibly the duration of your mortgage so that your debt-to-income ratio will be no higher than 31%. In other words, your payment on your first mortgage, including taxes and insurance, will be no more than 31% of your gross income. Your debt-to-income ratio won’t include payments on a second mortgage on your house, installment payments on a car or other secured property, or mortgages on other houses you happen to own.

To get to the 31% debt-to-income goal, a lender will first reduce the interest rate to as low as 2% (for five years), and, if necessary, extend the term of the loan to a maximum of 40 years (from its inception). Using this process, the lender reduces your payments to a debt-to-income of 38%. After that point, the government will share equally in the cost of the rest of the reduction down to 31%.

EXAMPLE

Your gross income is $8,000 per month, and your mortgage payment (including interest and insurance) is $3,400. That means you’re spending about 42.5% of your income on housing. Reducing your interest rate by about 2% would get your mortgage payment down to $3,000, giving you a debt-to-income of about 38%. Up to this point, the entire cost of the modification would fall on your lender. However, to further lower your payments to 31% of your debt-to-income ratio, the government and the lender would share equally in the cost. To bring your debt-to-income ratio down to 31%, or a mortgage payment of approximately $2,500, the lender would lower your interest rate all the way down to a minimum of 2%, and if necessary, increase your mortgage term beyond 30 years. The government would pay for half of the reduction in the monthly mortgage payment from a 38% to a 31% debt-to-income ratio. Mission accomplished.

Servicers can also modify a mortgage loan by reducing its principal or delaying payment on part of the principal until the end of the loan. It’s more likely, though, that the servicer will change interest rates and the length of the loan rather than forgive or forbear any principal.

Under the guidelines for the mortgage modification program, foreclosure proceedings must be suspended during the time that you are engaged in the modification process until the end of the three-month trial period during which you are making your new payments on your modified mortgage — assuming you are successful in obtaining one. HAMP is set to expire on December 31, 2012.

For more information about either HARP or HAMP, visit www.makinghomeaffordable.gov and click “Explore Available Programs.”