Making Home Affordable Modification Program (HAMP)

Mortgage servicers who participate in the Making Home Affordable Program are required to evaluate homeowners for the Home Affordable Modification Program (HAMP) before evaluating them for other options.  HAMP is designed to lower a first mortgage payment to 31 percent of verified monthly gross income to make payments more affordable.

To be eligible for a loan modification under HAMP, which is currently set to expire on December 31, 2013, the borrower must meet the following criteria:

1. The mortgage loan is secured by a 1-4 unit property, where one unit is the borrower's principal residence.; 
2. Have a mortgage balance equal to or less than $729,750 (or higher if more than one unit);
3. Have a first lien mortgage that originated before January 1, 2009;
4. Have a monthly first mortgage payment (including taxes, insurance, and HOA dues) greater than 31 percent of their gross (pre-tax) income;
5. Have a mortgage payment they can no longer afford due to a financial hardship that can be supported by documentation;
6. Have missed a mortgage payment or can show they are very likely to default on their mortgage soon
7. The mortgage is owned or guaranteed by Fannie Mae or Freddie Mac or is serviced by a HAMP participant (to determine if a loan is serviced by a HAMP participant go here).

Every modification under the program must lower the borrower's monthly mortgage payment to 31% of the borrower's monthly gross income.  To reach the target affordability level of 31%, the loan servicer will first reduce the interest rate to 2%.  If the borrower’s debt-to-income ratio is still above 31%, the loan term is then extended out to 40 years, followed by a forbearance of the principal at no interest until the monthly loan payment reaches the 31% target. The modified monthly payment will then remain in place for five years, provided the borrower remains current. After the first five years, the interest rate gradually increases to the prevailing Primary Mortgage Market Survey rate in place at the time of the permanent modification for the life of the loan.

Part of the HAMP evaluation includes using a standard Net Present Value (NPV) test to determine if the modification, including any government incentive, is economical from the lender's perspective.  If the borrower’s debt-to-income ratio remains too high despite the adjustments covered above or they do not pass the NPV test, then the modification request will most likely be denied. 

The debt-to-income ratio target for loan modifications is typically 31/55 (new mortgage is set at 31% of gross monthly income and the mortgage plus other recurring debts cannot exceed 55% of gross monthly income).  Also, as of July 1, 2010, unemployment benefits and severance pay are no longer acceptable sources of income for HAMP consideration.  If you are receiving unemployment benefits, or will be receiving benefits in the near future, the Home Affordable Unemployment Program may be a better option for you.    

If a borrower requests a loan modification from their mortgage servicer, and it is determined that they are eligible, the borrower will enter into a Trial Period Plan that is typically three months in length, but can be longer.  The trial plan is used to determine if the borrower has the discipline and actual ability to make the new payments in a timely manner and gives the lender more time to thoroughly review the application for approval.  A trial plan does NOT mean the modification has been approved.  The lower payments also typically affect the borrowers FICO score based on the modification not being final and the payments being lower than what the current note requires.

One problem that I have seen with this program arises when the borrower attempts to sell the property in a short sale within the first three years after their loan is modified.  Loan servicers receive a $1,000 up-front fee for each HAMP modification, plus an additional “pay for success” fee of $1,000 each year for up to three years as long as the borrower successfully remains in the program. Some lenders resist approving short sales following a loan modification because they do not want to lose this incentive that ends once the borrower drops out of the program following the short sale. However, when given the choice between a short sale and foreclosure, most lenders prefer short sales.  

Homeowners are also eligible to receive incentives under HAMP.  For every month a borrower makes a payment on time, they will accrue a $1,000 per year incentive that reduces the principal balance on their loan. The incentive is applied directly to the loan balance on an annual basis for up to five years for a total principal reduction up to $5,000. 

If it is determined that a borrower is not eligible for a Home Affordable Modification, the servicer can evaluate the borrower for other alternatives to keep the borrower in their home, such as an internal modification program or a forbearance (payments are put on hold for a period of time). These alternatives do not generally require trial payments and can take months before a decision is made.  Some servicers take so long to make a decision, that the home simply ends up in foreclosure and the borrower is not left with enough time to sell their home before the auction date.  

However, Washington's Foreclosure Fairness Act allows a HUD counselor or attorney to submit a borrower and lender/investor into mediation to work out a loan modification and thereby postpone foreclosure pending the outcome. A borrower must be submitted into mediation BEFORE a notice of foreclosure sale is received, so if you have received a notice of default contact a HUD counselor or attorney immediately to avoid losing the ability to take advantage of this important consumer law.  For more information on Washington's Foreclosure Fairness Act check out my August 21, 2011 post.

updated April 6, 2012