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HAMP: Managing Higher Payments After Interest Rate Resets

The Administration’s Home Affordable Modification Program (HAMP), which was created in February 2009 to provide relief for homeowners facing financial hardship by reducing monthly payments to affordable levels through lowered interest rates and modified loan terms, is nearing its conclusion.

With HAMP Tier 1, homeowners receive a modification that reduces their interest rate to as low as two-percent for the first five years and then gradually steps up no more than a one-percent a year until the market interest rate at the time of the modification is reached. The median payment reduction for a homeowner in HAMP is about $500 per month (about 36 percent). The typical HAMP homeowner will experience two to three step-ups; the nationwide median payment increase after the first step-up is $93, while the median payment increase after the final step-up is around $206.

According to Mark McArdle, Deputy Assistant Secretary of Financial Stability at the U.S. Department of Treasury, even with a step-up, homeowners in HAMP will have a lower monthly payment than before their modification. In addition, more than 90 percent of HAMP homeowners will step-up to a permanent interest rate at or below five-percent after their final interest rate step-up.

Through December 2015, approximately 287,000 homeowners who have completed a HAMP modification have experienced a step-up in their monthly mortgage payment, and the percentage of them that disqualify in the months following a step-up is less than or equal to one percent, according to Danielle Johnson-Kutch, Acting Chief of the Homeownership Preservation Office at Treasury.

“One of the benefits of HAMP is that we now have a data set that demonstrates that the rate can be significantly reduced to achieve payment reduction and then step-up as the borrower has recovered,” Johnson-Kutch said. “This early data suggests that homeowners are able to manage the step-up and it could be part of a modification structure on the go forward if it’s done in the moderate way that a HAMP step-up is done to gradually increase the payment.”

Treasury is monitoring the data closely and has created a three-pronged safety net to help borrowers should they struggle with a step-up to avoid re-defaulting. The prongs are one, requiring servicers to notify borrowers at two separate time points that a step-up is imminent (no less than 120 days from first rate increase and at least 60 days prior to first increase); the second is introducing post-modification counseling for borrowers who are at risk of re-default and have missed a payment; and the third is an enhanced suite of tools which include increased incentives for remaining current and improved HAMP Tier 2 modification options.

“The good news is we’ve been tracking the performance of HAMP loans fairly aggressively since the program started, and we have not seen, as of yet, a significant impact (of step-ups),” McArdle said, noting that there have been 18 separate monthly vintages of HAMP modifications that have increased after five years. Some have even reached their second step-up and Treasury has still not seen a significant impact. McArdle said Treasury has a toolkit in place that includes, among many other things, a way to track and handle HAMP step-ups to determine if the modifications are sustainable even after the program expires.

“One of the lasting legacies of HAMP is proving that modifications can work long-term. The performance of HAMP Tier 1 modifications after the benchmark of 24 months, overall 24 percent of those modifications that have aged 24 months have disqualified,” McArdle said. “For recent vintages, it’s as low as 17 percent. So basically, four out of five borrowers are performing after two years. Beforehand, the general perception of the industry was that modifications were always kicking the can down the road and that they weren’t sustainable. Now I think if you can provide payment relief, there’s enough evidence to show that a modification is a sustainable alternative.”

Barring Congressional action, HAMP will expire on December 30, 2016. To date, in slightly more than seven years, the program has helped 1.8 million families and completed 2.3 million homeowner assistance actions.

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