What is HAMP?
When first announced the HAMP program was touted as the be all and end all that would solve the ills of the mortgage meltdown. To homeowners caught up in the worst housing collapse in recent history it was a welcome piece of good news.
I am in the camp that believes that loan modifications need to be properly designed to work. At risk homeowners needed some help and hope, the Obama administrations plan to restructure loans gone bad is suppose to help four million home owners prevent foreclosure.
These are the 6 things you should know about the program.
1. Value: To qualify for HAMP a loan servicer will perform what is called a Net Present Value Test. This test simply compares the expected cash flow that the loan would generate after modification to the expected income if the loan is not modified. This means that if it makes more sense to modify economically the servicer is supposed to make that choice. To further entice servicers to modify loans the government has instituted subsidy payments to them for modified loans.
2. Payment Reduction: HAMP counts on the idea that struggling homeowners will keep their homes regardless of current value if they can make their monthly payments. Homeowners who are upside down when given the choice will keep there homes as losing as they can afford to make their payments. Most people will not "walk away" from their primary residence because it's worth less than they owe. Rather, people "walk away" from their homes when they can't afford to keep up with the payments. HAMP is designed to achieve lower payments in comparison with loan modifications early on in the mortgage meltdown which brought mortgages current but left payments alone or even increased payments.
3. Debt-to-Income: The Obama administration's plan forces servicers who have signed on to reduce monthly payments to between 31% and 38% of the borrower's gross monthly income. The servicer is required to get the payments down to 38% and then the government subsidizes a further reduction down to 31%. The steps of the program guide the servicer to begin the payment reduction by first reducing the interest rate to as low as 2%. If that does not bring the payment down to a debt-to-income ratio of 31% the next step in the process is to extend the amortization up to 480 months. The last step in the process is completely voluntary and as of the date of writing this article most servicers have resisted it. This step in the process asks servicers to reduce the principal balance of the loan in one hundred dollar increments until the 31% threshold is met. I believe that making this part of the program voluntary has slowed the effectiveness of HAMP in slowing foreclosures and hampered efforts to help at risk homeowners.
4. Valid Hardship: HAMP is designed to help homeowners who have been hurt by the recession. Only primary residences are eligible for participation in the program. Investors and speculators can't take advantage of HAMP. Some of the hardships considered to be valid are loss of income due to job loss, illness, divorce, military service etc.
5. Income Verification: Many borrowers who were able to obtain mortgages during the housing boom without having to provide income documentation may be surprised by the level of income verification that comes along with HAMP. Banks that wrote sign and drive or liar loans without as much as a job listed on the loan application now require complete documentation for a HAMP payment reduction. Some of the items an at risk borrower will need are pay stubs, bank statements, tax returns, profit and loss statements, SSN statements, pension statements etc.
6. Trial Period: One part of the plan that has caused problems and unnecessary delays is the trial payment period. The trial payments are designed to "train" borrowers to make on time payments. There is a strict requirement that payments being made during the trial period must be on time. There is no "grace period" for the borrower to stretch out the payment date. A borrower who plays games during this phase is playing with fire. If you are one day late with a payment the servicer can cancel your modification with no questions asked. Many servicers have been unable to submit the paperwork and process HAMP modifications efficiently enough to complete the modification during the trial period. Many homeowners have had to make 6 or 7 trial period payments while waiting for their modification to go permanent. If you are in the trial period make absolutely sure you make very single payment on time and comply with every request for documents.
Homeowners who are able to qualify for and obtain a HAMP payment reduction will be rewarded by saving hundreds of thousands of dollars in interest over the life of the loan, along with being able to continue living in the home for years to come.
For more information on HAMP visit: http://makinghomeaffordable.gov/