Did you receive an interest-rate reduction as part of a Home Affordable Modification Program (HAMP) loan modification in 2009? If so, the lower monthly payment that came along with it might begin a steady increase starting this year and could total as much as $1,724.
The majority of homeowners with HAMP modifications will see their monthly mortgage payments rise from 2014 through 2021, an issue first raised by HSH.com in early January. According to the latest quarterly report from the Special Inspector General of the Troubled Asset Relief Program (SIGTARP), 782,748 homeowners will eventually see their monthly mortgage payments rise by a median value of around $200 a month.
On Feb. 18, 2009, HAMP was introduced as a foreclosure-prevention program designed to help 3 to 4 million homeowners attain more affordable monthly payments. HAMP provided financial incentives to lenders that agreed to lower payments of struggling homeowners through interest rate and/or principal reductions and loan-term extensions.About 95 percent of HAMP modifications included rate cuts, with some homeowners seeing their rates fall to as low as 2 percent, according to the report.
How the rate-reset worksIn an effort to lower monthly mortgage payments to just 31 percent of gross monthly income, interest rates were slashed on HAMP-modified loans to as low as 2 percent for five years, which is why 2009 modifications are seeing their payments rise starting in 2014. After the five years, HAMP guidelines allow interest rates to start rising by a maximum of 1 percent each year until interest rates reach the point where 30-year conforming fixed-rate mortgage were at the time of the modification.
This means that some homeowners might see their interest rates rise on a yearly basis to as high as 5.6 percent. Be sure to utilize a mortgage calculator to determine the difference a higher mortgage rate will make on your monthly payment.
Many still need helpChristy Romero, special inspector general for the Troubled Asset Relief Program in Washington, D.C., said that many HAMP borrowers might not be able to afford these rising monthly payments.
"Many homeowners are not yet back on their feet," Romero said in an email interview. "Many of the homeowners that lowered their mortgages through HAMP in 2009 and 2010 have continued to struggle and are falling out of the program at alarming rates. Some homeowners in HAMP may have underwater homes or be unemployed or underemployed. For these homeowners, the prospect of paying a higher mortgage payment will be a challenge."
There's no other program like HAMPAlys Cohen, staff attorney for the National Consumer Law Center in Washington, D.C., agrees that many HAMP homeowners will need financial assistance to make their housing payments each month.
While Cohen says she is pleased that the Treasury is asking mortgage servicers to reach out to struggling borrowers, she hopes that lenders can also offer specific solutions for struggling homeowners.
"If there are unaffordable payments looming, notice is only the first piece of the puzzle," Cohen says. "People need affordable options."Cohen warns that there is no sustainable program on the horizon to take HAMP's place when that program expires on Dec. 31, 2015.
How to prepare for higher paymentsDan White, financial adviser and founder of Dan White and Associates in Glen Mills, Pa., says that preparing for higher monthly payments is all about planning ahead.
"Preparing for the higher payments is all about planning ahead. Homeowners should have been doing their homework," White says. "It's about prioritizing certain items in their budgets and looking at their finances from a long-term view rather than short-term pleasures. Housing and health insurance are the two things that should top the list of priorities in a person's life."
Will you be able to afford your new payment?Homeowners who are still facing the same financial or medical distress that led to their modifications in the first place are the ones who might suffer the most when their interest rates and payments start to rise, says Ric Runestad, retirement income specialist with Runestad Financial Services in Fort Wayne, Ind.
Homeowners who have overcome the financial distress that led to their modification should be able to afford these higher payments."What was it about your circumstances that led you to believe you could make your payments when you originally took out your loan?" Runestad says. "Your payment was lower for five years. If your financial situation has recovered from when you needed that modification, then you should be able to make your payments even as they increase."