What is the Home Affordable Modification Program (HAMP) ?
HAMP is a program (actually, half a program) developed by the Obama Administration as an attempted response to the foreclosure crisis in America. Unfortunately, due to pressure from the mortgage industry, the Administration backed away from the key part of the program, which would have allowed bankruptcy judges to reduce mortgage on primary residences to the current market value of the property, and then to restructure the entire loan, payments, term, interest rate, to be consistent with the principal reduction. This part of the plan was approved by the U.S. House of Representatives in March of 2009, but in order to become law, also had to be approved by the U.S. Senate. Not surprisingly, the mortgage industry objected strenuously, and the Obama Administration did not do anything to help it to pass in the Senate. Accordingly, it died. So what is left is only the "voluntary" half of the program, where the mortgage companies call all the shots. Not surprisingly, it is not working.
How Does the Home Affordable Modification Program (HAMP) Work ?
Your mortgage company is supposed to figure out whether it would do better economically to foreclose on you thant to give you any sort of slack. This is done by what is called the NPV test. NPV stands for Net Present Value. There is a formula the mortgage companies use to determine what they think they will get out of the property if they complete foreclosure. If this number is higher than what they think they will get if they allow you to make lower payments, they have no obligation to even consider you. So, the first thing they do is ask you for all your financial information. This is to see how much they can get from you. And, keep in mind that they are debt collectors, so whatever information they gain from you they can and will use aganst you if it benefits them. Then, they determine what they think your property is worth to them. There is no consistency to how they do this, and they don't have to tell you - and normally will refuse to tell you - what value they have.
What is a Trial Plan ?
The original idea was that they get your information, put you on a "trial plan" if the number seem to favor a HAMP modification, and have you make that payment for up to three months, during which they can verify your information and their property value. If everything checks out, they are then supposed to make that change permanent. However, that is NOT the way it is working. They have now hundreds of thousands of people making "trial payment" without any commitment from the mortgage company. Almost none of them have become permanent, even though most have gone on for far more than three months. So people are paying without knowing if it will do them any good at all, and often, after months and months of payments, they are getting denial letters for no particular reason.
Will the Home Affordable Modification Program (HAMP) Reduce Principal ?
Unfortuantely, no. the Home Affordable Modification Program (HAMP) DOES NOT reduce the principal of the debt. All it does even if you do succeed in getting through all the many hurdles is to reduce the payment for now. Not only does the total amount you owe not go down, it goes UP because the mortgage company takes whatever arrears, costs, force-placed insurance premiums, junk fees, etc. they say you owe and ADDS it to the total amount of the mortgage. Since the amount of the payments if you do get a modification under this program is usually not going to pay off the total debt within the mortgage term, in many cases you will wind up with a balloon payment at the end of the term.
Your mortgage company may tell you that they are authorized to give you a "principal forbearance". While that is true, it still does not reduce your debt, only your payment. A principal forbearance means that the mortgage company takes some portion of the total debt and removes it from the amortizatio
So If It Doesn't Reduce Principal at All, Why Do It ?
Once consumers understand how this thing works, most say they are not interested, particulary if their mortgage is significantly more than their home is worth. While it does delay the problem for the time being IF you get approved (and so far almost no one has been), it does not solve anything, and may make it a great deal worse. In effect, it lets you rent back your own house, while the chance of ever paying off the mortgage gets smaller and smaller. And, should you need to sell or refinance, you will probably not be able to do so, because the debt will be much larger than a buyer or new lender would ever give you.
I have some clients who for whatever reasons really do feel it is important to stay in their current house, and so are willing to risk it, but most decide it is of no benefit to most families. Furthermore, the mortgage companies get you in a position where you are making "trial payments", further increasing your loss in the property, without any commitment from them.
Why Do I Hear People Say that in HAMP Principal Gets Reduced ?
This is an area of major misunderstanding. There is a three step process that gets applied to your mortgage debt if you appear to qualify for HAMP, in order to get the payment down to no more than 31% of your total household income. The third of these is called "principal forbearance". This is NOT the same thing as reducing the principal; all it means is that your payment is calculated based on a smaller number than all the principal of the debt, and the rest of the principal is put at the back of the loan, where it NEVER goes down.
What is HAFA ?
Recently the Federal Government added a new set of programs as part of HAMP called Home Affordable Foreclosure Alternatives (HAFA). The purpose of this was to try to get the mortgage companies to be more cooperative when borrowers ask them to approve a short sale or a deed in lieu of foreclosure. It has been true that mortgage companies were extremely uncooperative in approving those, however the sad fact is that HAFA changes nothing. The idea was that the government would pay the mortgage companies a small amount of money to approve them, however, then they would have to waive the deficiency claim, which they will not do. So, while some people are being told that HAFA REQUIRES the mortgage companies to do these things, that is wrong. HAFA is voluntary - the mortgage companies do not have to do it, and normally will not.
Serious Legal Advice is Critical
No matter what you are considering doing, it is impossible to navigate through the chaos alone. What's more, there are so many scams preying upon people's homes, promising them mortgage relief. Do not pay anyone up front for a "mortgage modification" and don't listen to anyone who guarantees you that they can get you better loan terms. Make sure if you do hire someone to help you that it is a really experienced attorney. Realtors cannot give you legal advice, neither can "loan modification companies" or "mortgage consultants". In fact, there are enormous scams going on involving these sorts of "services" (See LEGAL GUIDE - Do I need a foreclosure attorney + foreclosure/mortgage consultants vs. foreclosure attorneys for details). It is really alarming how many people are being given completely incorrect advice by realtors and by "loan modifiers", "short sale negotiators", "forensic auditors", and "mortgage consultants".
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