HAMP (HAMP 2.0), the government’s Home Affordable Modification Program (not to be confused with HEMP), is a program designed to encourage refinancing and help borrowers reduce mortgage payments and move into more affordable mortgages.
HAMP originally included the following requirements (many of them very similar to other programs such as HARP, but some unique to HAMP):
- You live in the house as your primary residence
- Your mortgage predates 1 January, 2009
- Your mortgage payment is more than 31% of your monthly gross income (this does not include other debt
- You owe $729,750.00 or less on your home on your first mortgage (higher limits can apply if it is an owner-occupied property with between two and four units
- You are either behind on your payments or are in danger of falling behind, and you also have a financial hardship
- Your income is high enough to be able to make (and keep up) the modified payment, based on documented evidence
- In the last ten years, you did not get a conviction for theft, fraud, forgery, money laundering, tax evasion, or larceny in connection with a mortgage transaction
- Incentives to lenders and servicers to modify at-risk borrowers who have not yet missed payments when the servicer determines that the borrower is at imminent risk of default
- The deadline on HAMP filings/requests is December 31, 2012
After the lender determines that you are eligible for HAMP, they need to do a Net Present Value analysis (“NPV”) on the loan. This is basically a requirement that they check to see if it will cost the lender more to foreclose than to modify the loan. If modification is the cheaper option, the lender is required to tell you so and discuss modification options with you. The lender has to modify the mortgage under HAMP guidelines.
Even if modification is not cheaper under the MPV analysis, the lender can still offer you a loan modification under HAMP guidelines, though they are not required to do so. Also, if the lender rejects your modification request, you can check the NPV yourself.
HAMP’s goal is to change your debt-to-income ratio to 31% or less – your monthly payment on the first mortgage will be 31% or less of your monthly gross income.
Your lender does this by reducing your interest rate (lowest possible reduced rate is 2%) for a period of time, usually for five years. They can also extend the time on the loan to 40 years from when the loan was created. The lender modifies the loan in this way until the debt-to-income ratio is 38%, and the government and the lender then split the modification cost until the debt-to-income ratio is 31%.
The government also offers financial incentives to lenders who participate in HAMP. These include financial incentives to reduce the principal on the loan.
Once the new mortgage payment is established, you have a trial period of three months to make the new payment. If you don’t make the payments, the lender can proceed with foreclosure.
You can learn more about HAMP from the government’s website.
So that’s the original HAMP. What changed for HAMP 2.0?
First, people are using a naming convention that should have been thrown out seventeen years ago when Microsoft released Windows 95 instead of Windows 4.0.
Sorry about that; I couldn’t hold it in. Now that I’ve vented about that subject, here are more practical differences:
- HAMP 2.0 becomes effective in May 2012. It’s coming up quickly, folks.
- The deadline for HAMP will be extended an additional year (to December 31, 2013).
- The financial incentives for lenders are increased significantly – up to 63 cents on the dollar (from the previous maximum of 18 cents). This makes it more likely that lenders will agree to modifications.
- The mortgage modifications will be available to some rental properties and investment properties intended for renters, not just primary residences of the borrower.
- The decision will not just be based on the debt from the first mortgage – some other debt obligations will also be factored in