By: Michael Powers

In response to the mortgage and housing crisis of 2007, President Obama rolled out his Making Home Affordable (MHA) Programs. Beneath the MHA umbrella, The Home Affordable Modification Program (HAMP) was a key program, designed to provide struggling homeowners with payment relief and allow them to stay in their homes. This loan modification program has helped millions of U.S. homeowners, and served as the template from which all other loan modification programs were born. Unfortunately, the program was not without its defects, and one defect in particular could become problematic for those homeowners in a “permanent” HAMP loan modification.

One problem which is beginning to surface is the structuring of the modifications. Ironically, most of the HAMP modified loans will see consistent increases in their monthly payments over the first five years, much like the subprime loans they sought to correct. Unfortunately, the HAMP loan modifications were only intended to be short term solutions, and most of them have a graduating interest rate. A good example would be a loan that would start at 2% and graduate upward by 1% each year, until reaching a final fixed interest rate of 5%. While this is still a great loan, with interest rates not found in subprime loans, the increasing payment can become problematic for homeowners just barely able to afford their current payment. The supposition of HAMP was that a five year window would be enough time for some recovery in the housing market and the economy in general. Unfortunately, actual unemployment rates are still very high, and many people have seen a decline in their household incomes rather than a rebound.

One recent government report shows that more than 30,000 HAMP mortgages will see payment increases this year. The same report estimates that more than 750,000 HAMP mortgages will see changes in payment and interest rate sometime between now and 2021. The average increase is reported at $242, though that is the median amount. In the areas where mortgages are typically much larger, those payment increases could easily render a mortgage unaffordable.

Geographically, California, Florida, New York and Illinois make up more than half of the homeowners with active HAMP modifications which include an interest rate and payment increase. In addition, the median mortgage amount in those four states, when compared to the rest of the nation, is much larger. Coupling these factors means that those harder hit states now face greater risk of redefaults in HAMP mortgages.

As mentioned, HAMP has served as the blueprint, or template for most other loan modification programs, particularly bank specific, proprietary programs. Those proprietary modifications now account for the vast majority of loan modifications today, and are more generally written to create a lasting solution. Regardless, the HAMP program helped millions of Americans and certainly served its purpose in lighting the way for the creation of solutions for troubled mortgages. While the program’s overall performance was hampered by its limited reach, the program has prevented hundreds of thousands of foreclosures, and kept many families in their homes. The concern today is the series of monthly payment increases that are expected in those loans, and whether or not those homeowners will be able to afford those increases. Time will certainly tell.