The Home Affordable Modification Program was a godsend to many troubled homeowners after the financial crisis, allowing tens of thousands of mortgage holders to reduce their monthly payments to no more than 31% of their gross monthly income, often through interest rate reductions.
But, all good things must end, and HAMP – which helped many avoid foreclosure – was only a five-year, temporary fix. Now, modifications that began in February 2009 are maturing out of the program, and into a gradual increase in interest rates. For most, this means a final monthly payment increase of $196; for some, it could be as high as $1,724, depending upon where the average rate for a 30-year loan sat at the time of the modification.
Almost 90% of HAMP loans will see increases According to the latest report from the Special Inspector General for the Troubled Asset Relief Program, 88% of the nearly 900,000 active HAMP loans will see their payments rise between now and 2021. With many borrowers having their rate reduced to as little as 2%, a 1% per year rise will likely be painful. Some will see their rates reset up to 5.4% over the next few years — more painful still.
Obviously, the redefault risk is pretty high. As SIGTARP notes, those in the HAMP program the longest default at the highest rate – nearly 50%. Almost half of homeowners with HAMP modifications received them from 2009 to 2010. The overall default rate at the end of last year was 28%.
Which institutions hold these loans? Of the 10 major servicers involved with HAMP, Bank of America Corp. (NYSE: BAC ) , JPMorgan Chase & Co. (NYSE: JPM ) and Wells Fargo (NYSE: WFC ) are in the top five. At the end of 2013, redefaults for each bank associated with HAMP loans was 31% for B of A, 23% for JPMorgan, and 24% for Wells. Ocwen Loan Servicing and Nationstar Mortgage, the other two servicers in the top five, each had redefault rates of 30% and 26%, respectively. Can they expect a whole lot more in the next few years? It certainly seems like it.