IN FEBRUARY 2009, the Making Home Affordable Program (MHA) was introduced to help stabilize the housing market and enable struggling homeowners to avoid foreclosure. At that time, a number of steps were taken to help homeowners get down to no more than a 31 percent housing debt-to-income (DTI) ratio, in the hopes that this adjustment would enable them to remain in their homes.
With the introduction of the Home Affordable Modification Program (HAMP), servicers were able to reduce mortgage interest rates for troubled loans to as low as 2 percent, to extend loan terms and to offer principal forbearance to achieve this debt-to-income goal. These measures made mortgage payments more manageable so more homeowners could bring their loans into good standing and stay on track.
However, while these and other loan-modification measures were helpful to hundreds of thousands of homeowners, parts of the modified loan terms and conditions were limited to a set time period--usually five years.
Starting back in the spring of 2015, but accelerating significantly in 2016 and beyond, some of these modified loans will hit their five-year anniversary.
This means they will enter the stage of gradually stepping up their interest rates (no more than 1 percent per year) until they reach a cap rate based on the Freddie Mac Weekly Primary Mortgage Market Survey rate for 30-year conforming mortgage loans as of the date the modification agreement was originally written.
While some in the industry worry that this stage of the modified loan timeline could spark some re-defaults, there are significant incentives for homeowners to continue to make their mortgage payments. The MHA program originally included a "Pay for Performance" incentive to reward homeowners with up to a $1,000 reduction in principal for each year payments were made as contracted. That means that homeowners who have made their payments and remained in good standing for the full five-year period could receive a principal reduction of $5,000.
Still, the economy has not quite returned to the level of health we had hoped it would reach by now. Housing has not bounced back in all areas, and no one wants to see borrowers who have successfully made payments on their modified loans now re-default as interest rates begin to step back up.
On Nov. 26, 2014, the MHA announced changes to HAMP in order to further enhance the Pay for Performance incentives for borrowers. This change adds a new one-time Pay for...