Home Affordability Modification Program (“HAMP”) Lender Incentives to Modify Mortgage Payments
The Home Affordability Modification Program (“HAMP”) is the federal loan modification program designed to assist homeowners who can no longer afford their monthly mortgage payments. HAMP went into effect in 2009 as part of the Making Home Affordable Program and set out a series of standard guidelines for lenders to use when considering borrowers for loan modifications.
To participate in modification through HAMP, a number of eligibility criteria must be met:
- Loan must have been made on or before January 1, 2009.
- Property must be an owner-occupied primary residence, up to a maximum of 4 units.
- Unpaid principal balance on the loan for a single family residence cannot exceed $729,750.
- Monthly loan payment, including taxes, insurance and homeowners association dues, must exceed 31% of borrower’s gross monthly income.
- Borrower must have a documented financial hardship.
- The servicer must participate in HAMP.
Servicers of loans are provided financial incentives by the government to modify monthly payments to 31% of the borrower’s monthly gross income. The monthly payment includes principal and interest payments on the first loan, as well as taxes, insurance, and association fees, if applicable. Borrowers do not have to be in default on their mortgage payments in order to be considered for HAMP modification. Lenders have three tools at their disposal to reduce monthly payments:
- Lower the Interest Rate. Incentives encourage servicers to reduce the interest rate on the loan to as low as 2%.
- Extend the Term. If interest rate reduction alone does not lower borrower’s payment to 31% of gross monthly income, the servicer may extend the term of the loan, up to a maximum of 40 years.
- Forbear Principal. If a lower interest rate and extended term do not bring monthly payments down to a low enough level, a portion of the principal balance of the loan may be deferred until the loan maturity date.
Borrowers that initially qualify for HAMP modification consideration will be offered a 90 day trial modification program. While the borrower is in the trial modification program, the lender will determine whether the borrower is a candidate for permanent modification. The lender’s analysis focuses on the results of a Net Present Value (“NPV”) test, which determines whether the value of the loan to the investor will be greater if the loan is modified. If a permanent modification solution is offered, servicers receive compensation in the form of up-front payments, success fees when loans are modified, and reimbursement for some percentage of the reduction amount. Junior lien holders are also provided financial incentives to modify loans where borrowers received modification assistance from their first lien holder.
Unfortunately, just because a borrower successfully completes a trial modification program does not mean they will necessarily be granted a permanent modification solution. However, those borrowers not offered permanent solutions now have other alternatives to avoid foreclosure pursuant to the Home Affordable Foreclosure Alternatives Program (“HAFA”). HAFA provides options for homeowners who cannot qualify for or fulfill the terms of modification programs by allowing them to sell or convey their property for less than the full amount owed on mortgage loans against the property.