HAMP Modifications: Is Reset Risk an Issue?

Abstract

As of January 2014, more than 1.1 million homeowners had received a permanent modification of their mortgages through the government’s Home Affordable Modification Program (HAMP), which began in 2009. The program was intended to help homeowners avoid foreclosure as housing prices sank and unemployment soared nationally. Under HAMP, loans were modified so that the borrowers’ housing expenses were equal to 31% of their gross monthly income, or a 31% “front-end” debt-to-income ratio (DTI). Most HAMP modifications involve interest rate reductions, and although HAMP modifications are called permanent, most of those reduced interest rates last for only five years. Recently, concerns have been raised that HAMP interest rate resets, which begin later in 2014, could cause many borrowers to default on their modifications, thus lowering the number of program successes. Moreover, because many proprietary modification programs were modeled on HAMP, such concerns extend beyond HAMP. In this article, the authors look at the reset issue and demonstrate that it will manifest itself initially in 2016 and will be less severe than others have predicted.