Rates and Payments Set to Spike!
Nearly 900,000 HAMP mortgage modifications are scheduled to soon expire, and for many borrowers higher costs lie ahead. The government says that almost 790,000 borrowers will suddenly face steeper monthly payments, in some cases increases of $1,700 or more.
Rising monthly mortgage costs are never good news but the fallout may be less painful than government numbers suggest. To understand what's going on -- and to see what can be done if your loan is about to explode -- we have to return to 2009.
The housing market began to visibly collapse in 2007 and 2008. Foreclosure filings rose from 885,468 in 2005 to 3,157,806 in 2008 according to RealtyTrac. In an effort to stop the carnage, the government came up with such programs as Hope for Homeowners and FHASecure. Both were huge blunders, resulting in new loans for a total of fewer than 5,000 borrowers.
Almost 900,000 Homes Are Saved
In 2009 a new approach began, Making Home Affordable. Under the MHA umbrella, the government churned out several new options for people to refinance, including the Home Affordable Modification Program or HAMP. The program turned out to be a magic bullet, saving nearly 900,000 homeowners from foreclosure.
HAMP was designed for those who borrowed before 2009 and were either delinquent or in danger of falling behind on their mortgage payments because of lower income or a job loss. Under the plan, monthly payments were reduced to 31 percent of the borrower's income by lowering the interest rate, extending the loan term, forgiving principal or a combination of offsets.
Lenders, however, actually lowered loan costs to 38 percent of the borrower's income. The seven percent difference between the 31 percent and the 38 percent was paid for by Uncle Sam. In other words, the government paid a subsidy to keep some 900,000 families in their homes but it wasn't much of a subsidy: of the $19.1 billion set aside to help homeowners only $4.4 billion (23 percent) was actually paid out as of April 2013.
The subsidy was not intended to go on forever; it was limited to a term of five years. Since the HAMP mortgage program began in 2009, we are now beginning to see the first crop of higher monthly payments.
How High Can Payments Go?
According to the government, "a homeowner's mortgage interest rate can increase if the modified interest rate had been reduced below where the national average rate was for a 30-year conforming fixed-rate mortgage on the date of the modification. The average interest rate over the last five years has generally been between 3.5% and 5.4%, and most modifications cut mortgage rates well below that benchmark.
"After five years," says the Office of the Special Inspector General for the Troubled Asset Relief Program, also known as the SIGTARP, "the interest rate on the modified loan can step up incrementally by up to one percent per year until it reaches that benchmark."
HAMP Interest Increases
So, fortunately, with fixed-rate mortgage rates hovering around 4.25 percent at this time -- and with the one percent annual cap -- a lot of borrowers will only see modest increases.
At this point a little bit of context is in order: The typical monthly payment according to the SIGTARP was $1,422 before a modification, a cost that was reduced to $733. The new payment for most borrowers will be $990, an increase of $197 in most cases. In time, some borrowers could see monthly costs rise as high as $1,724, but that will only happen with larger loans. Under the federal program loans as large as $729,750 qualified for help.
What Should You Do?
First, contact your loan servicer. Not all loans under the program will see an increase. Ask the servicer if your loan payment will rise and, if so, when the higher payments will start and what you can expect to pay.
Second, five years will have passed before the subsidies end. During that time, loan balances have declined, meaning there is less principal on which to assess interest. This will help all HAMP borrowers.
Third, consider a new mortgage. At this writing, Freddie Mac says fixed-rate loans are available at 4.12 percent while 5/1 ARMs start at 2.98 percent. For some borrowers, a new loan might be advantageous if it results in a more-affordable monthly payment.
As always, check with LendingTree for the latest loan information and mortgage rates.