Fannie Mae and Freddie Mac have begun modifying loans for a group of borrowers too well off to qualify for the Obama administration's program.

These homeowners' mortgage bills have been eating up less than 31% of their incomes, the minimum debt burden to receive a permanent change in loan terms under the Home Affordable Modification Program. In some cases, the borrowers' mortgage debt to income was as low as 20%.

Critics of these "backup plans" for Hamp say they may be relaxing terms for borrowers who can pay their mortgages, and could give other comfortable consumers an incentive to seek aid. But the government-sponsored enterprises' regulator and other observers say mortgage debt to income is only one gauge of distress, and that Fannie and Freddie would lose more money for taxpayers by foreclosing than by aiding these consumers.

"These borrowers have proven themselves, and it's still in the enterprises' best interest to do a mod," said Christine Eldaratt, an executive adviser at the Federal Housing Finance Agency, which is also the conservator for Fannie and Freddie. Losses on a mod might amount to 10% while losses on foreclosures are at least 50%, she said.

The backup mods are designed for borrowers who made the three trial payments required under Hamp but did not receive permanent modifications. That's because they not only had a mortgage debt-to-income ratio of less than 31%, but they also did not provide the required documents verifying their incomes. Instead, they gave verbal statements or provided other documents.

Ivy Zelman, the chief executive of Zelman & Associates, a New York research and advisory firm, said giving mods to these borrowers poses the risk of moral hazard. "What about everyone else who is struggling and wants a reduction in their mortgage payment?" she said. "Potentially every consumer could be asking for a handout."

Zelman has estimated that 35% of borrowers in trial Hamp mods who failed to convert to permanent mods did not meet the debt-to-income requirement.

In the rush to create Hamp last year, the Treasury Department initially did not require that borrowers verify their income to start trials.

Ed Pinto, a consultant and former Fannie chief credit officer, said the backup plans were designed to aid people who verbally understated their incomes before starting trial mods. "They pushed all these people into Hamp mods who didn't qualify, and they now have this huge number that haven't been weeded out yet," he said. Pinto in recent years has been a prominent critic of his former employer.

Eldaratt would not say how many borrowers qualify for the backup plans except that they are fewer than 1 million. The number is finite since the plans are available only to borrowers who were put in trial mods before March 1. About 277,640 trial mods have been canceled; there were 637,353 borrowers in active trial mods at April 30.

The administration has been "very slow in cancelling trial mods," Pinto said. "They're going to count these somehow, some way so they can report a better number to make the Hamp program look more successful than it has been."

Though some borrowers may be paying a smaller portion of their income on their mortgage, Eldaratt said it would be unfair to characterize them as well to do or even able to pay. The borrowers have to sign hardship affidavits and express a desire to stay in the home, she said.

Because they do not qualify for Hamp, neither the borrowers nor the mortgage servicers will receive incentive payments, Eldaratt noted. She described the GSEs' backup Hamp plans as similar to internal modifications offered by banks for loans in their portfolios.

Gerald Alt, the president of LOGS Group LLC, a Northbrook, Ill., network of foreclosure and loss mitigation attorneys, said borrowers' total debt levels, not mortgage debt alone, is the problem.

"Many people would not have qualified for Hamp based just on their mortgage debt but they are struggling to make their payments because other obligations are eating up more than 70% of their income," Alt said.

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