The federal government’s Home Affordable Modification Program, known as HAMP, was designed to keep borrowers from losing their homes to foreclosure. It has resulted in lower monthly mortgage payments for more than a million homeowners.
But some industry experts are now questioning whether HAMP has only prolonged the inevitable. HAMP modifications are a five-year deal, and after that, the interest rate on the loan, which was typically reduced to as low as 2 percent, begins to gradually adjust upward.
Given that household incomes have been largely stagnant since the first HAMP modifications were approved in 2009, as the payments on these loans begin rising this year, many homeowners will find that they are once again at risk of default.
“From the beginning, it was very evident this was going to be a problem,” said Greg McBride, the chief financial analyst for Bankrate.com. “HAMP was only ever designed to kick the can down the road.”
Most HAMP borrowers received a rate reduction as one step toward lowering their mortgage payment to 31 percent of their gross monthly income. After five years, the reduced rate may rise by up to 1 percent annually to whatever the national average was for a 30-year fixed-rate loan at the time of the modification. The interest rate on some of these loans could rise to as high as 5.4 percent, and monthly payments could soar by as much as $1,724, the report says.
The median increase would be closer to $200 a month, but even that could be too burdensome for borrowers who couldn’t afford their payments to begin with and whose incomes haven’t changed since, Mr. McBride said. As it is, he added, about one in four HAMP borrowers already has defaulted on the modified terms. “There’s just not enough breathing room in most American household budgets,” to absorb a sizable rise in loan payments, he said.
More of these homeowners may have enough equity now to refinance, but that would still mean a mortgage with a market-level interest rate.
HAMP did help to set a new standard for an affordable loan modification based on borrower income and the value of the property, said Bruce Dorpalen, the executive director of the National Housing Resource Center, a nonprofit advocacy group for housing counselors and consumers. But it hasn’t been as effective as it might have been because participation by loan servicers is voluntary, he said. And borrowers only have “one bite at the apple.” Those who get a modification and then lose employment and fall behind by 90 days or more can’t go back and get a remodification under the same program.
“HAMP was designed for a two-year crisis,” Mr. Dorpalen said, “and we had a five-year crisis.”
The people most at risk as their rates start to rise are those who haven’t recovered from the recession or are on fixed incomes, he said. His organization has joined with other housing advocates to call for renewed, permanent modifications for HAMP borrowers who will be unable to afford their payments after the rate resets.
HAMP borrowers are concentrated in four states: New York, California,Florida, and Illinois. The median payment increase for borrowers in New York is an estimated $286, according to the inspector general.
HAMP was set to expire at the end of last year but was extended through 2015.