In February 2009, the Making Home Affordable (MHA) was introduced with hopes of stabilizing the housing market and to assist homeowners that were struggling avoid foreclosure. The following month, the U.S. Department of the Treasury (Treasury) created and issued guidance for loan modifications throughout the mortgage industry. The program was called HAMP, and is now refered to as HAMP tier 1. Since then, that first program has been expanded to HAMP Tier 2 in order to include more possibilities and more homeowners
HAMP Tier 1 had the following guidelines of eligibility laid out by the Treasury:
- The mortgage loan must be originated on or before December 31, 2008
- The mortgage must be a first lien
- The property must be in livable condition
- Financial hardship must be documented by the borrower
- The borrower must prove not to have sufficient liquid assets
- An escrow account must be set up for the taxes and insurance prior to the modification
- The current unpaid principal balance must not be $729,750 or less
- The property must be 1 to 4 unit property
- There can not be any previous Loan Modification under HAMP
- The borrower must be delinquent or in risk of default
- Any other loans in foreclosure are eligible
- The property must be principal residence
- The monthly payment must be greater than 31% of the borrower’s monthly gross income
- All documentation must be submitted by the borrower on or before December 31, 2013
Once the borrower has met all this criteria, their bank’s Loss Mitigation Department will review all information provided to determine if they are eligible for the HAMP Program. They have a process they are required to follow to lower the mortgage payment, including PITA and any association fees or escrow shortages.
HAMP 1 loss mitigation process:
- The lender will capitalize (add to the loan balance) the accrued interest, homeowners insurance, property taxes and other out-of-pocket escrow advances as well as other servicing advances such as legal fees and preservation fees paid to third parties.
- After the lender has the new balance figured, the interest rate is reduced to get hit the 31% ratio for the target monthly mortgage payment. This rate can be as low as 2.00%.
- If lowering the interest to 2.00% does not get the payment low enough, extending the loan up to 480 months is reviewed.
- If lowering the interest to 2% and extending the loan term still doesn’t meet the target monthly payment of 31%, the lender then subtracts a calculated amount away from the unpaid principal balance. This “principal forebearance” is non-interest bearing and non-amortizing. It will also create a balloon payment that will be due and payable at the earliest possible time the borrower transfers the property, pays off of the loan through a refinance or at when the loan matures. This IS NOT principal forgiveness, rather just a temporary fix to get payments within a certain threshold.
Once these four steps have been taken, most times, the borrower will benefit from a lower monthly mortgage and will not pay any out-of-pocket money. The goal is to give a homeowner a reasonable and manageable monthly payment so that they can keep their home and avoid foreclosure.