Mortgages: Beware Of Exploding HAMP Loans

For more than 900,000 American homeowners the government's Home Affordable Modification Program -- HAMP -- has been the difference between housing and homelessness, a proven way to prevent foreclosure.

HAMP Help Is Temporary

The catch is that HAMP modifications aren't permanent. Government help for beleaguered homeowners is limited to five years and for some early HAMP borrowers time is up. No less important, the number of HAMP borrowers impacted by the deadline will ultimately grow to include more than 750,000 borrowers.

What's going on here? What can you do about it?

The HAMP program was introduced in 2009 and was the first federal effort to effectively aid homeowners facing foreclosure. HAMP is a loan modification for people who have run into financial difficulty. The deal was this: you had a loan issued before 2009 and either were delinquent or in danger of being delinquent. Under HAMP your existing loan would be modified so that mortgage costs would be limited to 31 percent of your monthly income.

Whatever the math, homeowners were elated. The typical mortgage bill was reduced by $543 per month, a huge difference that for many families meant solvency instead of foreclosure.

HAMP Problems

While HAMP was surely attractive, it has two fundamental problems.

First, a lot of people have fallen out of the HAMP program.

More than 800,000 homeowners could not complete the three-month trial HAMP program. Critics of the program cite this as a "failure" and miss the greater point: The HAMP program was open to borrowers in great financial difficulty, people who had lost jobs and income and faced the loss of their homes. Being in HAMP did not create new jobs or raise household incomes but it has saved more than 900,000 homes from foreclosure.

More than 1.3 million homeowners finished the HAMP trials and obtained "permanent" loan modifications. However, of this group, 375,000 could not keep up their payments and dropped out, leaving 939,000 homeowners in the program.

Second, "permanent" HAMP loan modifications aren't permanent.

Under the HAMP program, lenders did not lower mortgage payments to 31 percent of the borrower's income. Behind the scenes, the lender modified the loan so it did not top 38 percent of the borrower's income, then Uncle Sam chipped in some financial help, and that's why the borrower's payment is 31 percent of his or her gross income.

It's government assistance which makes possible the seven percent reduction in monthly loan costs -- 38 percent minus 31 percent equals seven percent. That can get to be a lot of assistance, considering the number of mortgages involved. As a result, "permanent" modification assistance is limited to five years.

Once the five-year assistance period runs out "the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification," according to the government. This means most HAMP borrowers are likely to see significant monthly payment increases once the modification term ends.

HAMP Payment Increases

The Special Inspector General of the Troubled Asset Relief Program says, "of the 894,302 homeowners who had active HAMP permanent modifications as of November 30, 2013, 88%, or 782,748 homeowners, are scheduled for these eventual interest rate and payment increases. The median payment increase after all rate increases will be around $200 per month."

What can you do if you face an impending HARP increase?
Certainly you should be happy to be in the HARP program. Instead of foreclosure, you have been able to keep your home. If the average HARP borrower saved $543 a month, that's a benefit equal to $32,580 ($543 x 60 months), a very big deal.

Notice that the lender can "gradually" go back to the rate in place at the time of the modification. This means that the full size of the payment increase will not come into effect immediate. On the other hand, what's "gradual" to lenders may be steep for borrowers.

For details, HAMP borrowers should speak with loan servicers to see when mortgage payments will adjust, the expected loan balance at that time and the probable initial new payment.

Refinancing Out of Trouble

If you have been making payments regularly and your income and credit have been restored, you should also see if refinancing makes sense. Maybe get a 20-year or 15-year fixed-rate loan at a lower rate to replace your current financing, or offset a payment increase by stretching out your remaining balance over a new term.

Whatever you decide, be informed and don't be surprised by the coming change. Just remember, when the government says something is "permanent" they're just kidding. Unfortunately, a new and higher monthly mortgage payment isn't a joke and HAMP borrowers should take steps to protect themselves.

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