HAMP Rate Reset: Just the Facts
Mark McArdle, Chief of the Homeownership Preservation Office
The Home Affordable Modification Program (HAMP) has set new standards for mortgage assistance in the housing industry. Many private sector modifications now look a lot like HAMP modifications, with over four million homeowners in private sector modifications benefiting from the framework of the HAMP program. Below are answers to questions about how the HAMP rate reset will impact homeowners in the program.
1. What are HAMP rate resets and why are they resetting?
HAMP was designed to provide deep and immediate payment relief to homeowners facing financial hardship, particularly those who were facing steep payment increases due to products such as option ARMs that were common during the housing boom. After five years at a rate as low as two percent, most homeowners in HAMP Tier 1 modifications will experience a gradual interest rate increase of up to one percent per year until their rate adjusts to the market rate at the time of their modification. For 92 percent of homeowners, this will result in a rate at or below five percent, well below the homeowner’s interest rate before modification. The typical final rate increase after all resets will result in a cumulative monthly payment increase of approximately $200.
2. Is HAMP still a good option for struggling homeowners?
Homeowners in HAMP receive some of the most meaningful payment relief available, which increases the likelihood of their long-term success at avoiding foreclosure. On average, HAMP has reduced homeowners’ first lien mortgage payments by a median of $544 each month – almost 40 percent of their median before modification payment. This significant payment reduction makes HAMP a more affordable and sustainable solution than most other programs in the marketplace today.
3. How many people will be impacted by the resets and when?
Rate resets will begin in the 3rd quarter of 2014 (October 2014) for the approximate 30,000 homeowners who received modifications in 2009. As of December 2013, a little over 80 percent of borrowers will experience at least one future rate reset. The majority of HAMP borrowers will experience two or three resets, but the number of resets and the amount of the payment increase will vary depending on the effective date of the modification, whether the modification included principal forgiveness and other factors. The maximum rate depends on the modification year, and ranges from an average of 3.7 percent in 2013 to 5 percent in 2009. After the rate adjustments, the vast majority of homeowners will have an interest rate well below the average pre-modification interest rate of 6.3 percent.
4. What is Treasury doing to help homeowners prepare for rate reset?
Treasury remains committed to working with homeowners, servicers and others to help families succeed in their modification. With the extension of MHA to December 2015, Treasury will maintain its oversight of participating servicers. We will monitor the interest rate resets to ensure that if signs of homeowner distress arise, servicers are ready and able to help by providing loss mitigation options and alternatives to foreclosure. Treasury has taken a number of steps to proactively monitor, and where applicable, address potential risks due to interest rate resets:
- Treasury requires servicers to inform homeowners of the rate reset when they receive their modification.
- Treasury requires servicers to provide a detailed notice on any upcoming reset no less than 120 days from the first rate reset.
- Effective March 1, 2014, the largest servicers in HAMP will offer financial counseling to all homeowners entering a new trial period plan, and homeowners already in a permanent HAMP modification who are at risk of defaulting, in an effort to assist those homeowners in staying current on their mortgage payments.
Mark McArdle is the Chief of the Homeownership Preservation Office at the United States Department of the Treasury.