The Affordable Home Modification Program (HAMP or Home Affordable Modification Program)was introduced by the federal government in 2009 in an attempt to help homeowners with difficulty paying your mortgage and that, therefore, they were facing an imminent risk of foreclosure. Your main goal? Well, reduce the chances of families losing their homes.
In a brief summary, we could say that the HARP program was directed to those households that allocated more than 31% of your gross income for the mortgage payment. As with its twin – or rather, its cousin, HARP – this program is no longer active. In fact, it expired at the end of 2016; but let’s see what it was.
What is the HAMP program and how does it work?
As we said, the Home Affordable Modification Program (HAMP) was created in response to the subprime mortgage crisis of 2008 and was part of the Troubled Asset Relief Program (TARP).
We are going to travel back in time to contemplate the scenario. Following the real estate crisis of 2008, American homeowners were in big trouble. They couldn’t sell their houses and they couldn’t refinance them either, as the market crashed and new restrictions were placed on the credit sector.
This had two consequences: property values also fell, while monthly mortgage payments became unaffordable because higher interest rates went into effect, at least for adjustable-rate mortgages (ARMs). This prevented families from going to the bank and renegotiating their debt. Why? For several reasons:
- Mainly because the borrowers were considered high risk. In the first place, they shouldn’t even have given him a mortgage loan.
- Second, many people lost their jobs. It is difficult to renegotiate the terms of a mortgage when the borrower is not stable (financially speaking).
- And last but not least, because the value of the houses was much less than the value of the current debt of the loan. If the borrower defaulted and the bank foreclosed, they would not gain anything from the sale.
That was the scenario of 2008-2009. Although taxpayers subsidized some of the loan modifications, arguably HAMP’s most significant contribution was the standardization of what could be defined as a random loan modification system.
How to qualify for the HAMP program?
In order to qualify for the HAMP program, mortgagees needed to demonstrate that their monthly mortgage payment was 31% of your gross monthly income or more. There were also other requirements, such as the property having to pass the Net Present Value (NPV) test.
A property became eligible if the analysis showed that the lender or investor who was entitled to collect the loan you would make more money modifying it than running it. Aside from the requirement that the homeowner demonstrate financial difficulty in paying the mortgage, the home had to be habitable and have an unpaid principal balance of less than $729,750.
The relief arguably helped households in the United States in various ways, but all roads aimed for the same effect: reduce monthly payments. For example, eligible homeowners could benefit from a reduction in the principal outstanding on their mortgages or perhaps a decrease in the interest rate.
There was also the possibility of requesting a temporary deferment of mortgage payments, a financial term known as indulgence. And, as long as it was favorable for his family, the owner could opt for the option of extending the terms of his existing loan.
In many cases, an already modified loan was also eligible for HARP, further lowering the mortgage payment. Families who participated in this program actually lowered their monthly payments. As soon as? According to figures published by the Treasury Department, an average of $530.
Special Considerations About the HAMP Program
The government refers to the relationship between payments and gross income as the relationship between debt and income (DTI or Debt To Income). The HAMP program, working in conjunction with mortgage lenders, helped provide incentives for banks to reduce their debt-to-income ratio to less than or equal to 38%. The Treasury, for its part, stepped in to minimize the DTI ratio to 31% or less.
As you can see, HAMP incentivized private lenders and investors to finance adjustments to their active loans. The mortgage servicers received an initial payment of $1,000 for each modification made. These lenders were also eligible to receive up to $1,000 annually for up to three years for each family that participated in the program.
The original Affordable Home Modification Program was limited to primary residences only. In 2012, the program was extensively revised to also include vacant homes, multi-mortgage home ownership, and real estate with a DTI ratio of less than or greater than the original 31% requirement.
The Home Affordable Modification Program (HAMP) vs. the Home Affordable Refinancing Program (HARP)
While HAMP helped people on the brink of foreclosure, homeowners with underwater mortgages -or that they were close to that point- they were the ones who qualified the HARP. This last program allowed homeowners whose homes were worth less than their outstanding mortgage balance to refinance their loans. People with a loan-to-value (LTV) ratio of more than 80% – and up to a maximum limit of 125% – were allowed to refinance their mortgages with quite attractive rates.
They could only participate in the HARP those homeowners whose loans were guaranteed or purchased by Fannie Mae or Freddie Mac, as long as this acquisition took place before May 31, 2009. The eligibility requirements also included that the owner must be up to date with their mortgage payments.
Note: Mortgage holders also benefited from this program as they had a more stable and collectible mortgage product in their hands.
The deadline to apply for HARP was -originally- set for December 31, 2017. But that date was extended until December 2018.
In short, what is the HAMP program?
The Home Affordable Modification Program, or HAMP, was a home loan modification program designed in 2009 to help homeowners in financial difficulty avoid foreclosure.
It was itself released to the public in the wake of the 2008 housing crisis and was operational until 2016, unlike HARP which was extended until 2018. Through the HAMP program, the government allowed homeowners to reduce the principal of your mortgage and/or interest rates.
It also served to request a temporary deferral of payments or one loan extension.