Rate resets on government program may cause rise in re-defaults

Five years ago, the Obama Administration launched the Home Affordable Modification Program (HAMP) designed to save homeowners from foreclosure; the program offered reductions in monthly interest rate or the total loan principal. Over a million people have participated in the program.

Homeowners who qualified for rate reductions received fixed rates for five years as low as two percent. As the five-year periods complete this year for the nearly 33,000 homeowners who were the first to take advantage of the government program, rates will start to rise by one percent each year, resulting in an average increase of about $200 in monthly payments. Over the next seven years, over 780,000 borrowers will experience the rising rates. This jump could move many borrowers close to default again.

An underlying assumption or hope with HAMP was that the temporary relief it afforded homeowners would be accompanied by an economic recovery that would enable them to find more sustainable means to service their loans and afford their homes. That expected recovery has been protracted: incomes have remained stagnant, employment has made limited improvements in only certain market segments. Many of these borrowers are in much the same situation as when they applied for the program.

Re-defaults have become an issue. The Troubled Asset Relief PROGRAM (TARP) report by the Special Inspector General found that, as of November 30, 2013, 28 percent of all HAMP borrowers had gone back into default with an additional 100,000 “at risk” for defaulting. The re-defaults could potentially affect market inventories and pricing as well as perception and momentum.

The program has been extended through 2015; rate increases scheduled to start this year will continue through 2021. Thus, while HAMP may have initially saved a million homeowners from foreclosure, the short-term fix may just have delayed the inevitable for many.

(Background information sourced from California Association of REALTORS®)

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