How the HAMP Program Works, supposedly. – Alabama Consumer Credit Attorney Judson E Crump

The HAMP Program says this about itself:

“The Making Home Affordable Program was announced by the U.S. Department of the Treasury in February 2009 in an effort to help stabilize the housing market and provide relief for struggling homeowners.”

OK, that’s real nice, but how, exactly does it work?

There is a 212 page handbook published by the Treasury that you can download here:

http://www.makinghomeaffordable.gov/forpartners/understandingguidelines/Documents/mhahandbook_43.pdf

If you don’t have time to read 212 pages of government legalese, here are the basics:

1.  If you can’t afford to make your monthly payments (or if you think you’re going to start getting behind on them soon), you send in an application for a loan modification, along with other documents relating to your income, your loan, and the property.  The basic application is called an “RMA” (short for “Request for Mortgage Assistance”).  And you can download a copy of it here: https://www.hmpadmin.com/portal/programs/docs/hamp_borrower/rma_english.pdf

2.  Then the mortgage servicer (the people who collect your payments and send you statements – not necessarily the people who made you the loan or who own your mortgage note) analyzes your application to see if you meet the basic qualifications.  The qualifications can vary depending on the policies of the mortgage note owners (usually pools of investors with names like “Ameriquest Mortgage Securities Trust 2006-R7”), but the most prominent program (HAMP Tier 1) requires that you live in the property, that the mortgage payment be more than 31% of your documented gross income, and that you have a stated hardship or expected hardship.

3. If you qualify, then they have to run some math calculations to see how they can reduce your payment to less than 31% of your previous payment amount.  This is how the calculation works:

Step 1: Capitalize the bullshit.  This is all the random charges like property inspection fees, attorney fees, corporate advances, force-placed insurance premiums, etc. that your mortgage servicer has tacked onto your loan since they got a hold of it.  A very large amount of these charges are bogus or excessive, and you should scrutinize every single one of them.  The modification process assumes that all outstanding charges are valid and re-capitalizes them.  In other words, if you owe $85,000 in principal on your mortgage and they say you owe $10,000 in random crap, then the modification process will basically ‘refinance’ your loan with a new $95,000 principal balance.  This is a huge handout to the mortgage servicers because all of their bogus charges and fees magically become legitimate when you agree to the modification.

Step 2.  Reduce the interest rate.  This step is good for borrowers.  The calculation lowers your interest rate point by point until it either a) reaches the target debt-to-income ratio (usually 31%), or b) bottoms out at about 2%.  The reduced rate will apply for the first 5 years, then the rate will rise to “market rate” based on the market at the time you get the loan modification.  Today, that means about 5%.  Pretty good, really.

Step 3.  Stretch the loan out a few more years.  If reducing the interest rate doesn’t get your payment low enough, then the servicer can extend the term of the loan for up to 40 years.  So basically, you’re turning your 30 year mortgage note into a 40+ year mortgage note.  This ultimately is a pro-bank provision, because they get to collect more interest.  But it still is a good deal for you if its the only way you can afford your home.

Step 4.  Defer Principal.  This is a consumer-friendly part.  If, after going through steps 1, 2, and 3, your payment is still more than 31% DTI (or whatever the target ratio is in your case), they start reducing the amount of principal that gathers interest until they get to the target payment amount.  So if your balance is $95,000 and even after reducing the interest to market rate and stretching the loan out to 40 years, they’d have to take interest on only $80,000 of the balance in order to get your payment low enough, then that’s what they do.  What about the rest?  It gets “deferred” – which basically means that you owe it at the end of the loan – either as a balloon payment (if you live long enough to pay it all off) or it has to be paid whenever you sell or refinance the property.

Step 5.  NPV Test.  Once they’ve figured out what it would take to get your payment to the required level, they do a “Net Present Value” test – a test that determines if the bank will make more money by giving you the loan mod or just foreclosing.  This test takes into account your credit score (the likelihood of you paying back the loan), the property value, and other things to help the servicer figure out if modifying your loan is a winning or losing proposition.  If you are “NPV positive” – meaning that giving you a loan mod will make you more money – then they have to offer you a modification.

Step 6.  Trial Period Plan.  Once the computers have decided that you qualify, then they offer you a trial period plan – basically they give you 3 months during which you can make your modified payment, rather than your previous payment.  If you make all three of these payments on time, they have to give you a permanent modification.  Yes, they have to.  If they don’t, give me a call, and we’ll fix it.

Step 7.  Permanent Modification.  Once completed your trial payments, they offer you a permanent modification, which you can either accept or reject.  If its a better deal for you, take it.  If not, reject it.

Long story short, you can get a really good deal through the HAMP program, but it isn’t all about helping homeowners.  The banks not only are protected from unwanted losses, but they also get direct cash payments from the government for offering you a successful modification.