Loan Modification Interest Reset

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22nd Jul 2014

Interest rates for many loan modifications are due to be reset.

The Treasury Department launched its Home Affordable Modification Program (HAMP) in 2009 and modification activity peaked in 2010.  At the time, the prevailing mortgage rate was 5%, but servicers reduced the majority of borrowers’ rates to 2% to make payments more affordable.

The terms of HAMP modifications include rate resets after five years, in 100 basis point annual increments — meaning that by 2015, those HAMP mods from 2010 could experience the first of three annual 100-basis point resets to bring the interest rate up to 5%.

With a 100-basis point step up in the rate, the median monthly payment increase is about $95 each year, with the majority of HAMP borrowers experiencing two to three rate increases, according to Treasury estimates.

A spokesman for Wells Fargo, the industry’s largest servicer, says the bank is “currently reaching out to customers five months prior to the effective date of their interest rate change and then send a reminder communication two and one half months before the change becomes effective” under HAMP.

Under Consumer Financial Protection Bureau rules, servicers must notify borrowers of a reset 120 days in advance. This notice must include contact information for borrowers to contact housing counselors for advice and assistance.

Many HAMP borrowers facing rate increases may qualify for alternative modifications, including a HAMP Tier 2 which offers borrowers a fixed rate based on the current mortgage rate and a new 40-year term. The current mortgage rate on a HAMP Tier 2 mod is 4.25%.

Treasury officials wanted to keep this option open for the borrowers facing resets, which is one reason the department extended the HAMP program through 2016.