Loan Modification Rate Increase Question

[Account Closed]

Let me start with "I'm a newbie."

I've started hearing a little bit about rate increases for homeowners who used the government's Home Affordable Modification Program (HAMP) loan modifications beginning in 2009 (5 years ago). 

Can someone please help me understand the consequences, if any, this will have on real estate markets?  My newbie logic says: rates will increase, creating larger payments for homeowners who seem to not be making more money, resulting in defaults and better deals for investors. 

What am I missing? Why isn't this a bigger topic? 

[Dion DePaoli]

It's important to understand HAMP was not really a big/large success to begin with.  There were something to the tune of less than 1 million borrowers in the program.  While that may sound like a large number, it really is not.  California had around 15k borrowers, but not all that number is a tier 1 mod, many states didn't even make it to 200 borrowers.

The adjustment is a gradual step up to current prevailing rates year over year.  Most HAMP loans are around 1% or 2% and prevailing rate as of yesterday was around 4%.  The gradual step up is to avoid borrower payment shock.  The national average payment increase in dollars is around $190.  Some states, like CA, HI, NY, NJ with high priced real property on average have a slight higher than average increase but those are still less that $400 in dollar increases to the payment.  

It's also important to understand that they will not all adjust on the same date, month or even year.  So, less than a million loans adjusting in small batches, while not ideal, is manageable.  

It's also important to understand that a requirement to receive a HAMP mod was principal forgiveness taking the new LTV to 90%. So, fundamentally these loans should have some equity to work with. Keeping in mind, 90% LTV to start and 60 payments earning equity through principal pay down. So, an RE sale would allow the borrower out if needed.

In addition, most HAMP borrowers had temporary (I guess we are to believe) income setbacks as a result of the crash.  So the idea is, the program gave time to find an alternative or new income source.  That might be an interesting statistic when it all flushes out.  Point is, the borrower's were to some extent targeted to be able to go through the entire program including the rate increase.

HAMP is a government baby, it was criticized by many and still is.  I would be inclined to think that the powers that be are watching this program and will step in to save face in the event that delinquencies rise or defaults rise sharply.  Ultimately, I do not think it will be too much of an issue though.