Real Estate & Mortgage Insights

Re-defaults Loom Large as Mortgage Modification Payments Set to Rise

Five years after the launch of the Obama Administration's Home Affordable Modification Program (HAMP), homeowners who were once close to default may again struggle to make their mortgage payments as the modification terms begin to reset higher in 2014.

HAMP was designed to save millions of American homeowners from foreclosure by offering mortgage modifications that would either reduce their monthly interest rate or their total loan principal. Over a million people have participated in the program to date. Those who qualified for rate reductions got fixed rates for five years for as low as 2 percent. For the earliest borrowers, those five years are now up and their rates will start to rise by 1 percent each year. That will result in an average increase of $200 in monthly payments, a jump which could push many close to the edge of default again.

"From the beginning, it was very evident this was going to be a problem," said Greg McBride, the chief financial analyst for Bankrate.com in a New York Times article. "HAMP was only ever designed to kick the can down the road."

And the end of the road will have come for roughly 33,000 homeowners this year. Over the course of the next seven years almost 783,000 borrowers will be affected by the rising rates. In the Special Inspector General's report on the Troubled Asset Relief Program (TARP), it was reported that the median mortgage payment currently for those who received mortgage modifications is $773 a month. With the rate increase that would rise to a median of $989 a month, a steep climb for those already struggling to pay their mortgages. Those in coastal areas like California and Florida whose average mortgage payments are much higher could see their new payments rise to as much as $1,700 a month.

"We're already seeing alarming re-default rates and are really worried that this could lead to more," said special inspector general Christy Romero. "It will be a real challenge for people to pay the higher amounts."

The hope with HAMP originally was that by giving homeowners temporary relief on their payments, it would buy time for the economy to recover and for them to find more sustainable ways to afford their homes. Yet as incomes have remained almost stagnant since the beginning of the program and the employment market has made only limited improvements, many of these borrowers are in no better financial shape now than they were in 2009.

In fact, as Romero noted, re-default has been a major issue with HAMP from the start. The report found that as of November 30, 28 percent of all HAMP borrowers had already gone back into default. An additional 100,000 are "at risk" for re-defaulting.

So while HAMP may have saved a million Americans from foreclosure for a few years, it may not have been much of permanent help to many borrowers. The program has been extended through 2015 and the rate increases are scheduled to start in 2014 and continue through 2021.