The Home Affordable Modification Program (HAMP) began as part of the Trouble Asset Relief Program (TARP) in 2009 as an effort launched by the U.S. Treasury to help homeowners stay out of the foreclosure process. It was created in 2009 as a response to the subprime mortgage crisis that caused financial markets around the world to struggle because of the high levels of unsecured debt. It provides targeted aid to those hit the hardest by the crisis, coordinating with the Making Home Affordable (MHA) programs to reduce burdens on consumers.
Some of the programs that are part of the HAMP process or work with MHA including the following opportunities.
- The Principal Reduction Alternative assists homeowners with a loan-to-value ratio exceeding 115%.
- The Home Affordable Unemployment Program offers forbearance to unemployed homeowners.
- The Second Lien Modification Program creates a mechanism for servicers to modify second liens when a homeowner receives a first lien modification through HAMP.
- The Home Affordable Foreclosure Alternatives Program allows a homeowner to exist their home to a more affordable living situation through a short sale or deed-in-lieu process.
After this program helped several million American homeowners restructure their debt in some way so that they could stay in their homes or find a more affordable place to live, HAMP was not extended. The program expired at the end of 2016, primarily due to a decreasing number of applicants and an increase in property values.
While it was active, these were the pros and cons that the Home Affordable Modification Program that were achievable.
List of the Pros of the Home Affordable Modification Program
1. The program helped to keep families in their homes.
When the subprime mortgage crisis hit, many households found themselves struggling with high mortgage payments, few job opportunities, and a lot of extra debt that they were struggling to manage. People were choosing between their medical bills, grocery needs, or keeping their mortgage current. If you were behind on payments or had the foreclosure process already starting, then HAMP gave some folks an opportunity to put the brakes on what was going on. The program encouraged lenders to find a way to help families move forward with a restructuring of their debt.
2. HAMP would not impact your credit score with a refinance.
If you were eligible for a refinancing package because of HAMP, then you would not see an adverse impact to your FICO credit score. There were strict guidelines that you and the lender had to follow when restructuring your debt, but the settlement processes did not create the same issues that would occur if you were approved through regular channels for this lending opportunity. That meant you could get your monthly payments into a manageable position without ruining the future potential for additional credit if needed.
3. There were numerous ways to restructure a mortgage under HAMP.
The goal of the Home Affordable Modification Program was to help financially struggling homeowners avoid foreclosure by modifying their loan in some way. There were numerous methods that lenders could use with the help of HAMP to make this happen, including the use of a fixed interest rate, changing the terms of an adjustable-rate mortgage to be more favorable to the homeowner, offering principal reduction, providing a forbearance, or shifting overdue payments to the end of the loan to extend the terms.
4. HAMP offered clear and consistent guidelines for implementation.
The Home Affordable Modification Program was an ambitious program that also worked hard to make sure everyone understood what the pros and cons of it would be. It offered clear and consistent modification guidelines that required specific eligibility circumstances for homeowner qualification. Then it provided incentives for investors, servicers, and borrowers to work together so that the resulting loan could be sustainable over the long term. Thousands of homeowners can thank the presence of HAMP for helping them to stay put.
5. It offered different tiers that included properties that were not owner-occupied.
During the early years of the Home Affordable Modification Program, the loans which qualified for modification had to be tied to your primary residence. If you owned a second home or had multiple loans for multiple real estate, then you were not initially eligible. In June 2012, HAMP revised the scope of the program to offer Tier 1 and Tier 2 modifications.
Tier 1 became the umbrella were owner-occupied primary residencies still qualified for modification as with the first ideation of the program. If you had a property that was not owner-occupied or juggled several loans for multiple properties, then the Tier 2 modifications allowed you to take advantage of HAMP as well. There were different net-present value calculations to consider with each tier, but properties with up to 4 units became eligible with this option.
List of the Cons of the Home Affordable Modification Program
1. There were specific eligibility requirements that had to be met by the homeowners.
Some homeowners were unable to qualify for HAMP even though they were in financial distress. That is because there were several eligibility requirements in place that had to be met to qualify for the program. All loans had to originate on or before January 1, 2009 or they would not be serviced by the program. First-lien loans with an unpaid principal balance of up to $729,750 were permitted. The borrower’s debt-to-income ratio had to meet certain standards, which at one point had to be 31%. Proof of income, a signed IRS Form 4506-T, and an affidavit of financial hardship were required.
The property in question could not be condemned or deemed to be inhabitable either. If you did not meet one of the eligibility requirements, then you were not approved for the HAMP benefits that were possible.
2. It didn’t always keep people in their homes.
The goal of HAMP was to help families who were struggling with their mortgage payments in some way. If you could not afford the monthly payment, then the goal of the program was to help you get out of that loan into more affordable housing. Although short sales and the deed-in-lieu process certainly helped that situation, it created an immediate adverse credit issue for those households. A FICO credit score drop of 200 points could occur even when you took advantage of this program’s efforts to resettle you out of the property that was killing your finances.
3. You could not switch programs once the process started.
Once you started the modification process through HAMP, then you were committed to the settlement process. Even if the outcome proceeded toward something that was unexpected or not wanted, there may not have been anything you could do until the process of modification review was complete. Many homeowners found this program to be useful so that they could stay in their homes, but that wasn’t the case for everyone.
When HAMP trial programs were offered to customers beginning in 2009, they could still report any missing payments off of the original amount as a past due issue to the major credit reporting agencies. If you agreed to a principal reduction, then that amount could count as income that needed to be reported to the IRS. There were just as many financial issues after joining the program as there were before it for some families, but they couldn’t do anything about it because of the terms of the Home Affordable Modification Program.
4. It did not resolve loss-of-income issues that some homeowners faced.
Steve and Linda (we changed their names) purchased their home in 2006. They decided to take out a home equity line of credit in 2007 for their Colorado property because he had just received a promotion at work, and she had started a new job that paid $10,000 more per year. They signed the paperwork, consolidated their debt, and made some property improvements.
Then Steve was laid off from his job as a crisis training specialist the next month. It took him almost a full year to find another position, which only lasted for six months. They struggled to make their mortgage payments with the new structure, even resorting to using an insurance check meant for their car to cover the expense. They ended up using the deed-in-lieu program to get out of the mortgage after trying to hold onto the house for almost 3 years since refinancing was not an option for them at the time.
HAMP could help homeowners who needed restructuring, but it could not solve their long-term loss of income issues.
5. There were lots of roadblocks in the way of the approval process.
Karen Mena and her husband found themselves struggling with their home in San Bernardino after their business went under. They had refinanced their home several times during the housing boom, but by 2009, they were in dire straits financially. It took them over 2.5 years to go through the HAMP process because there were several roadblocks in the way of the approval process. They would receive rejections because the paperwork was reportedly never received, there were missing financial documents, or the paperwork was improperly completed.
By August 2010, the Los Angeles Times reported that the Mena family received a threat of foreclosure. They applied again for a loan modification. Even though the bank promised that a sheriff’s sale wouldn’t happen while going through the process, the foreclosure was complete by December of that year. They got their foreclosure retracted after finally being approved for HAMP, but that wasn’t the case for everyone.
6. The NPV test through HAMP only took the investor’s needs into account.
In 2012 when the Home Affordable Modification Program changed to allow two tiers of modification, the net-present value (NPV) calculation became one of the most significant components of the application process. Each tier had its own complex calculation that it followed to determine what the best outcome for the investor would be. The test predicated modification if the investor would make more money that way instead of foreclosing on the property.
If the NPV showed that the investor would make more by foreclosing, then the program shifted to either short sale or deed-in-lieu processes to encourage the affected household to leave without damaging the home on their way out. Lenders were even paying people for the appliances that were left behind if the homeowners didn’t move out with them.
7. There was no guarantee of a permanent status under HAMP.
When homeowners applied for the Home Affordable Modification Program starting in 2009, they were usually granted an approval for a trial modification under the terms of the program. Under this structure, you were asked to make all of your trial payments according to the terms and conditions of the MHA program. Even if you reached all of the goals as a trialist, there was no guarantee that you’d be given permanence in the final HAMP structures. There were roughly the same number of people rejected after completing their trial modifications as there were accepted for the program, sometimes only because their income level turned out to be inadequate.
8. Lenders could demand a full payment on the difference after the trial period.
One of the biggest shocks that some homeowners encountered with their mortgage lenders through HAMP was that after the trial period, they could demand that you immediately repay all of your savings if denied permanent status. That meant the difference between the original payment and the reduced amount was due immediately. Since the trial program could go for five months before you received a final decision, the difference was several thousand dollars for some homeowners.
9. There was no guarantee that you could actually save money with this program.
The loan modifications that were available through the Home Affordable Modification Program were intended to help save homeowners money in some way. That process didn’t always involve a lower monthly payment. Although you wouldn’t be asked to pay more than 31% of your monthly pre-tax income under the government program, some homeowners were struggling with payments even below that level. Some who applied for HAMP support discovered that they couldn’t receive a needed reduction because they had purchased too much house for themselves during the subprime lending period.
There are homeowners who were able to work out an extension or change in terms so that their mortgage became a 40-year product instead. That reduced their monthly payment immediately, but it also increased the amount of money they’d pay in interest over the lifetime of the loan. Many homeowners discovered that attractive terms for a short-term solution could create long-term problems.
Conclusion of the Pros and Cons of HAMP
HAMP was designed to help homeowners who were struggling financially to avoid foreclosure to modify their loans in a way that made the debt become more affordable to them. The goal was to help these households become sustainable over the long term so that lenders could continue to support the debt. Through interest rate reduction, shifts from ARMs to fixed-rate products, forbearance, and term extension, there are many families in homes today thanks to the efforts of this program.
It is also notable that some homeowners who couldn’t save their homes through HAMP are still dealing with the financial fallout from this problem still in 2019. Steve and Linda are still renting a home after losing theirs 8 years ago. They recently applied for a mortgage and were denied not because of the deed-in-lieu, but with the other debt issues that surrounded the financial crisis. They expect to have their credit profile repaired enough by the summer of 2020 to purchase once again.
The Mena family continues to share their experiences in fighting the foreclosure process to let others know that there is still hope.
The pros and cons of HAMP are important to review because mortgage settlements are still possible, even if this program is no longer around. By understanding what could happen with your finances, it is possible to manage your home, mortgage, HELOC, and other debts in a way that can help you stay on your property for many years to come.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.