Homeowners who participated in the Home Affordable Modification Program (HAMP) are eligible for a new $5,000 principal reduction if they are current on their mortgage six years after their mortgage modification. Further, mortgage servicers are required to offer homeowners the option to re-amortize the reduced mortgage balance.
In addition to the principal balance reduction, HAMP is also reducing interest rates for alternative HAMP modification (Tier 2) borrowers by 50 basis points after the sixth year of the modification.
The new HAMP incentive aims to prevent homeowners from defaulting on their mortgage payments, as announced by the U.S. Treasury and the Department of Housing and Urban Development (HUD)/
The principal reduction incentives are called Pay-for-Performance Success Payments, and are excluded from income for tax purposes. [IRS Revenue Ruling 09-19]
Mortgage servicers will provide written notice of the new incentives to homeowners on or before the fifth anniversary of their modification date. For those who have passed their fifth anniversary for modification, notice will be given no later than April 1, 2015. The new incentives are expected to benefit nearly one million HAMP modified homeowners.
HUD also announced the Home Affordable Foreclosure Alternatives (HAFA) program will increase the amount of relocation assistance it offers under its foreclosure alternatives from $3,000 to $10,000.
HAMP incentives across both tiers
HAMP divides its mortgage modification program into two tiers:
- Tier 1, a basic modification program, reduces a homeowner’s monthly mortgage payment to 31% of their gross monthly income through a series of steps (e.g. principal forbearance, lowered interest rates or term extensions); and
- Tier 2, an alternative modification program, is available to homeowners who do not meet Tier 1 eligibility requirements — for example, their mortgage is for rental property or their debt-to-income (DTI) ratio is too low — and similarly reduces monthly payments to 25% to 42% of a homeowner’s gross monthly income by providing a low, fixed rate for the life of the mortgage.
Tier 1 homeowners are currently eligible for a $1,000 incentive during each of the first five years. With the new $5,000 incentive, Tier 1 borrowers are now eligible for a total of $10,000 in principal balance reductions.
Tier 2 borrowers are not eligible for an incentive during the first five years. However, they will receive both the new $5,000 incentive and a 50 basis point reduction to their interest rate.
Anticipating higher interest rates
The decision to enhance HAMP incentives is a response to an impending increase in HAMP interest rates. For Tier 1 borrowers, HAMP interest rates are fixed for the first five years, and then gradually increase up to 1% per year for the following three or four years. The final rate is not to exceed the homeowner’s initial interest rate at the time of modification.
Thus, homeowners who enrolled in the program at its inception in 2009 have recently watched their interest rates begin the steady, costly ascent. After increases, monthly mortgage payments are expected to rise by an average of $200.
The revised incentives merely ease homeowners into the increased rates by lowering their principal balance and minimizing the effects of progressively higher interest rates.
A key point to note: HAMP’s rate schedule resembles current and forthcoming interest rate trends in the market. Interest rates have generally followed a downward trend during the last few years, resulting in more funds available to buyers each year. From January 2014 to January 2015 alone, the average 30-year fixed-rate mortgage (FRM) rate dropped from 4.49% to 3.80%, and the average 15-year FRM rate dropped from 3.52% to 3.07%.
However, the Federal Reserve (the Fed) is expected to raise short-term rates in early 2016. Lenders will begin to increase mortgage rates in late 2015 to maintain their margins, in anticipation of Fed action. Increased rates impact home sales volume, prices and, more importantly, buyer purchasing power (BPP).
Thus, expect BPP to dip in the coming years as mortgage rates rise and homeowners are unable to qualify to take on higher monthly payments.