What is the Home Affordable Modification Program (HAMP)
The Home Affordable Modification Program (HAMP) was a federal government loan modification program introduced in 2009 to help struggling homeowners avoid foreclosure. HAMP's focus was at helping homeowners who were paying more than 31-percent of their gross income toward mortgage payments. The program expired at the end of 2016, but a sister initiative, the Home Affordable Refinance Program (HARP) replaces it and extends through 2018.
BREAKING DOWN Home Affordable Modification Program (HAMP)
The creation of the Home Affordable Modification Program (HAMP) was in response to the subprime mortgage crisis of 2008. Homeowners across America found themselves unable to sell or refinance their homes during this period. Also, the affordability of monthly payments caused when higher market rates kicked in on their adjustable rate mortgages (ARMs) damaged many. Although taxpayers subsidized some of the loan modifications, arguably the most significant contribution of HAMP was standardizing what had been a haphazard loan modification system. HAMP incentivize private lenders and investors to fund their loan adjustments.
HAMP Eligibility: The NPV Test
Determination of eligibility was through a calculation called the net present value (NPV) test. Properties had to pass the NPV test and meet other eligibility standards. If the analysis showed a lender, or investor currently holding the loan, would make more money by modifying the loan rather than foreclosing, the property became eligible. Besides the requirement that a homeowner prove financial hardship, the home had to be habitable and have an unpaid principal balance under $729,750.
How Relief Worked
The Home Affordable Modification Program (HAMP) relief took several forms all of which would have the effect of reducing monthly payments.
- Eligible homeowners could receive reductions in their mortgage principal
- Reductions in their interest rate
- Temporary postponement of mortgage payments, also known as forbearance
- An extension of the current loan terms
In many cases the new, modified loan was also eligible for HAMP modification, thus reducing a homeowner’s payment even further. Families in the program decreased their monthly payment by a median of more than $530.
Incentives for Lenders
The government refers to the ratio of payments to gross income as the front-end debt-to-income (DTI) ratio. The HAMP program, working in conjunction with mortgage lenders helped provide incentives for banks to reduce the debt-to-income ratio to less than or equal to 38-percent. The Treasury would then step in to minimize the DTI ratio to 31-percent or less.
Mortgage servicers received an up-front payment of $1,000 for each eligible modification they performed. Also, these lenders could receive up to $1,000 per year for each borrower in the program for up to three years.
The original Home Affordable Modification Program was limited to primary residences. In 2012, the program was revised to include homes not occupied by the owner, households with multiple mortgages, and homeowners whose DTI ratio was below the original requirement of 31 percent or higher.