A Mortgage Shocker That’s on the Way for 800,000 Homeowners

At-risk homeowners who modified their mortgages through HAMP to help them stave off foreclosure have a new problem: looming interest rate increases.

This post comes from Bob Sullivan at partner site Credit.com.

At-risk homeowners who took advantage of the federal government’s emergency plan to help them stave off foreclosure during the housing crisis have a new problem: looming interest rate increases.

Banks began sending notices in June, warning that rates for these homeowners will soon rise, and with them, monthly mortgage payments — by an average of about $200, or nearly 25 percent.

Both the increases and the number of homeowners hit by them will be staggered, however, so government officials are hoping the impact will be muted. Still, four states will be hit with half of the nearly 800,000 mortgage payment increases overall — California, Illinois, Florida and New York — and monthly payments will eventually rise as much as $1,724, so there is certain to be some struggle when the resets hit.

Median monthly payments on the loans will climb from $773 to $989, according to a report issued by the special inspector general of the Troubled Assets Relief Program.

The Home Affordable Modification Program or HAMP, born at the height of the housing crisis in 2009, gave struggling homeowners the chance to modify their mortgages through a series of adjustments — most commonly, interest rate relief that decreased rates to as low as 2 percent. Banks received incentive payments from the government for each modified loan.

The rate relief was not permanent, however. The HAMP program calls for modified loan rates to begin to climb back up to market average rates on the five-year anniversary of the adjustment, one percentage point each year. The maximum rate will vary, but for most HAMP borrowers, it will be about 4 percent or 5 percent. That means buyers whose loans were modified in 2009 will see their mortgage interest rates rise to 3 percent this year, 4 percent next year, and so on.

The first set is slated for adjustment in October. Banks must warn mortgage holders 120 days in advance, meaning the first official notices were sent out at the start of the summer. A second warning note will arrive near Labor Day.

“The majority of HAMP borrowers will experience two or three resets,” said Mark McArdle, chief of the Homeownership Preservation Office, in a Treasury Department blog post.

The increases will hit 88 percent of homeowners who took advantage of HAMP — a total of 782,000 mortgage holders. Only 30,000 HAMP loans will reset in October, because very few HAMP loans were approved during the program’s first year. The biggest glut of HAMP resets will come in 2015, when 319,000 homeowners who got HAMP loans in 2010 will face increases.

The increase does not impact the roughly 5 million mortgage holders who had their loans modified through “proprietary” programs controlled directly by their banks.

McArdle said the Treasury Department is ready to act if the loan resets threaten to trigger more housing trouble.

“We will monitor the interest rate resets to ensure that if signs of homeowner distress arise, servicers are ready and able to help by providing loss mitigation options and alternatives to foreclosure,” he said. Back in March, Treasury ordered larger banks to offer financial counseling to mortgage holders, he added.

More on Credit.com:

Stacy Johnson

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  • Key Typer

    As a taxpayer, I am getting a bit tired of propping people up who made awful financial decisions. Could we PLEASE end this predatory bank behavior and teach people how NOT to get in over their heads? EVEN if they lose a job or someone gets sick, be sure you have some savings to float you and yours. And any bank who takes advantage of the elderly or people who are not mentally capable of making good choices should be put out of business. Use your local credit unions, people.

    • Elysia Orlando Calouro

      I would say…you have been lucky not have found yourself in heir shoes. You have no idea! Watch “Spent” on YouTube for a more accurate portrayal of the middle class. You really make me shake my head and pity your ignorance. But then like I said- you have been fortunate and do not know better.

      • Key Typer

        Do YOU know your FICA score? Do YOU, who are calling ME ignorant know the percentages on your mortgage, credit card, car loans, or student debt? Do you know how to figure out how much to take out for taxes every year, or how to calculate an ROI on any investment you make, whether it be a jacket or real estate?? Schools should be teaching these things to our kids. People shouldn’t have to learn the hard way or on the fly. WHAT are my school taxes paying for? US is atrocious in mathematics and basic reasoning skills. Stop calling me ignorant and stop watching television. DO something to educate yourself about your finances that doesn’t come from a screen. Oh, and BTW, the producer of that little media nugget is AMEX who runs “Ace Check-cashing service”, cited as one of the most predatory businesses a while back and actually got sanctioned for it. (They were called another name then ,but AMEX owned them.) So don’t go spouting off about how enlightening this “movie” is. It’s an OLD story and been going on since the days of dereg. Some of them were charging military ppl as much as 200% on a payday loan. AMEX is no better than any of them.

  • Facebook User

    What does this mean for rates of new mortgages? Are they also going to rise, or is that just for the HAMP program?

  • beachbaby

    Here we go again! How ridiculous is it that the “solution” to the 2009 crisis turns out to be the same type of thing that caused the problem, adjustable rates that people cannot afford. Insanity is defined as repeating the same thing over and over expecting different results and this is INSANE. All these people did was kick the can down the road. And, while there was ample time, since 2009, for these people to save money for this inevitable increase, My belief is there won’t be many who are prepared. They will all line up for the next government hand out. Meanwhile, those of us who have been responsible homeowners will suffer a decline in our property value that has been sluggish since 2009.

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