HAMP Borrowers Facing Hike in Interest Rates

During the recent housing crisis, at risk homeowners took advantage of the federal government’s emergency plan to help avoid falling into foreclosure. Unfortunately now many could be facing a new crisis, which is an increase in interest rates.

According to the article in aol.com, banks began sending out notices in June, warning of interest rate increases, and of increases in monthly mortgage payments. Those affected face an average increase of around $200, equating to nearly 25%.

The mortgage interest rate increases and the number of homeowners affected by them will be staggered as a government officials hope to limit the impact. In spite of this just four states which are New York, Florida, Illinois and California, will account for half of these mortgage payment increases, affecting nearly 800,000 mortgages. It’s estimated monthly payments could eventually increase by as much as $1,724 so it's almost certain that some people will struggle when their rates are reset. According to a report issued by the Special Inspector General of the Trouble Asset Relief Program, the median monthly payments on mortgages will increase from $773 to $989.

The Home  Affordable Modification Program which is shortened to HAMP began life in 2009 at the height of the housing crisis. The idea was to enable homeowners struggling to meet repayments to modify their mortgages, usually through interest rate relief that brought down rates to as low as 2%. The government gave banks incentive payments for each modified loan. Obviously this mortgage interest rate relief was never intended to be permanent, and the program stipulates that modified loan rates should begin to increase back up to market average rates on the five-year anniversary of the mortgage adjustment, at 1% each year.

The maximum rate varies according to the exact loan modifications, but is typically around 4% or 5%. This means homeowners who had their loans modified in 2009 will see that mortgage interest rates increased to 3% this year, and 4% next year, and so on. Most of the borrowers on these modified loans will experience two or three mortgage rate increases to reset their rate. The first set of rates adjustments is due to begin in October, and banks have to give homeowners 120 days’ notice, which means those first affected received letters at the beginning of the summer. They'll receive a second notice around Labor Day.

There are a total of 782,000 mortgage holders who will be affected by these increases, but just 30,000 loans will be set in October due to the low numbers approved when the program was initially introduced. Next year will see a far larger number of homeowners affected by these increases, as 319,000 homeowners took advantage of these loans in 2010.