What is the Home Affordable Modification Program (HAMP)?

The Home Affordable Modification Program (HAMP) was one of the first of the federal programs under the Making Home Affordable program that were intended to help homeowners avoid foreclosure. If you are having a tough time making your mortgage payments and you qualify for HAMP, your monthly mortgage payment could be lowered to 31% of your verified monthly gross (pre-tax) income. According to the Making Home Affordable website, the typical HAMP modification results in a 40% drop in the monthly mortgage payment and 18% of HAMP homeowners have reduced their payments by $1,000 or more.

HAMP Reduces Debt-to-Income Ratio

HAMP's ultimate goal is to adjust the interest rate and possibly the duration of your mortgage so that your debt-to-income ratio will be no higher than 31%. In other words, your payment on your first mortgage, including taxes and insurance, will be no more than 31% of your gross income. Your debt-to-income ratio won’t include payments on a second mortgage on your house, installment payments on a car or other secured property, or mortgages on other houses you happen to own. You can find an easy-to-use calculator on the Making Home Affordable website that will help you determine your debt-to-income ratio (click “Get Assistance,” then “Payment Reduction Estimator”).

To get to the 31% debt-to-income goal, your servicer will first reduce the interest rate on your mortgage to as low as 2% (typically for five years) and, if necessary, extend the term of the loan to a maximum of 40 years from its inception. Using this process, the servicer will reduce your payment to a 38% debt-to-income ratio (assuming your debt-to-income ratio started out higher than that). After that point, the federal government will share equally in the cost to reduce your debt-to-income ratio down to 31%.

Example: Your gross income is $8,000 per month, and your mortgage payment (including interest and insurance) is $3,400. That means you’re spending about 42.5% of your income on housing. Reducing your interest rate by a couple of points would get your mortgage payment down to $3,000, giving you a debt-to-income of about 38%. Up to this point, the entire cost of the modification would fall on your lender. However, to get the payment down to 31% of your gross income, the government and the lender would share equally in the cost. To bring your debt-to-income ratio down to 31%, or a mortgage payment of approximately $2,500, the lender would continue to decrease your interest rate until it reached 2%, and if that still left you above 31%, it would lengthen your mortgage term.

Servicers can also modify a mortgage loan by reducing its principal or delaying payment on part of the principal until the end of the loan (this is known as forbearance). It’s more likely, though, that the servicer will adjust the interest rate and the length of the loan, rather than forgive or forbear any principal.

What Happens to Your Foreclosure Under HAMP?

Foreclosure proceedings are supposed to be suspended while you are engaged in the HAMP modification process. If you don’t make your payments on the new modified mortgage during the three-month trial period, the foreclosure can proceed again.

What About Second Mortgages?

If your first mortgage is (or was) permanently modified under HAMP, and you have a second mortgage on the same property, you may be eligible for a modification or principal reduction on your second mortgage under the Second Lien Modification Program, or 2MP. According to the Making Home Affordable website, “2MP is designed to work in tandem with HAMP to provide a comprehensive solution for homeowners with second mortgages to increase long-term affordability and sustainability.”

If the servicer for your second mortgage is participating in this program, it should automatically evaluate you for a second lien modification. Relatively few servicers have chosen to participate in 2MP, but they include the largest of the large lenders, such as Bank of America, Wells Fargo, Chase, Citi, and GMAC.

You may be eligible for 2MP if you meet all of the following criteria:

• Your first mortgage was modified under HAMP.
• You have not been convicted within the last ten years of felony larceny, theft, fraud or forgery, money laundering, or tax evasion in connection with a mortgage or real estate transaction.
• You have not missed three consecutive monthly payments on your HAMP modification.
• You owe more than $5,000 on your second mortgage.
• Your monthly second mortgage payment is more than $100.

More Information

To see if you qualify for HAMP, see our article The Home Affordable Modification Program (HAMP): Do You Qualify?

For a general discussion of HAMP and calculators to help you arrive at key ratios and likely payments if your mortgage is modified, visit the Making Home Affordable website (click “Learn More,” then “Modification Evaluator”).

Excerpted from The Foreclosure Survival Guide, by Stephen Elias (Nolo).