Mortgage-relief program extended

Mortgages generic

(MoneyWatch) The Home Affordable Mortgage Program, or HAMP, the government-sponsored program that offers incentives to banks to lower borrowers' mortgage payments, is set to be extended a further two years.

HAMP was set to expire at the end of this year, but despite the recent signs of a recovery in housing sales and prices, government officials said it makes sense to extend the life of  the program to help homeowners who are in financial distress.

Since 2009, about 1.2 million homeowners have had their mortgages permanently modified, resulting in lower payments. Under HAMP, mortgage companies are offered incentives to lower the borrower's monthly payments to 31 percent of their income. This can be accomplished by stretching out the time to pay the loan, reducing the interest rate or even by forgiving some of the principal owed on the loan.

Last year, the eligibility criteria for HAMP were expanded to include:

1. Mortgages on homes where the owner is not the resident, but the home is rented (or the intention is to rent it)
2. Homeowners who did not previously qualify because the debt-to-income ratio was lower than 31 percent
3. Homeowners who previously received a HAMP trial plan or a HAMP permanent modification but defaulted on their payments

The effectiveness of this and other programs under the Making Homes Affordable initiative has been criticized for several reasons. First, because many of the folks who take advantage of it still lack the income to make timely payments. Even after the mortgage was refinanced or modified, they end up back in default. By some estimates, up to half of homeowners with modified mortgages  "redefault." In addition, the process and documentation requirements are very detailed and complex, so failure to follow instructions closely can result in lengthy delays. Finally, the number of distressed borrowers helped by HAMP is relatively low when compared to the number of borrowers in some stage of foreclosure.

For some, other options to consider include a short sale or transfer of ownership to the lender via a deed in lieu of foreclosure. For homeowners, the better of the two is the short sale: Discharging a mortgage through a short sale, though it may harm your credit rating, is still less damaging. Those who opt for a short sale can find themselves viable candidates for a new mortgage in as little as three years.

  • Ray Martin

    View all articles by Ray Martin on CBS MoneyWatch»
    Ray Martin has been a practicing financial advisor since 1986, providing financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.