By: Michael Powers
In response to the mortgage 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. It was designed to provide struggling homeowners with payment relief and allow them to stay in their homes. HAMP has helped millions of homeowners, and acted as a blueprint for all subsequent loan modification programs. Unfortunately, the program had defects, and one is particularly problematic for those homeowners in a “permanent” HAMP loan modification.
HAMP was intended to be short term
One problem which is beginning to surface is the structuring of the modifications. Most of the HAMP modified loans will see consistent increases in their monthly payments over the first five years. Ironically, the increases are similar to the subprime loans they sought to correct. Unfortunately, HAMP loan modifications were only intended to be short term solutions, with a graduating interest rate. A good example would be a loan that starts at 2% and increases by 1% each year for 3 years. The loan would eventually have a fixed interest rate of 5%.
Unfortunately, the increasing payment can become problematic for homeowners just barely able to afford their current payment. The supposition of HAMP was that five years would be enough recovery time for the housing market and economy. Unfortunately, mortgage delinquency is still very high, as household incomes remain stagnant.
One recent government report shows that more than 30,000 HAMP loan modification recipients will see payment increases this year. The same report estimates that more than 750,000 HAMP mortgages will see payment and interest rate increases before 2021. The average monthly payment increase is reported at $242, though that is the median amount. In tareas where mortgages are larger, such 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 is much larger when compared to the rest of the nation. 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 for most loan modification programs, particularly bank specific proprietary programs. The proprietary modifications now account for the vast majority of loan modifications today. Regardless, the HAMP program helped millions of Americans and certainly served its purpose of quelling the mortgage crisis. While the program’s overall performance was hampered by its limited reach, the HAMP loan modification program has 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.