In February 2009, the Obama Administration introduced a comprehensive financial stability plan that included help for homeowners - the Home Affordable Modification Program (HAMP).  It is intended to provide eligible homeowners the opportunity to modify their mortgages to make them more affordable.  It has even been extended to help unemployed homeowners and those who are "under water"  on their mortgages.  But, the program may not be all its cracked up to be... it may actually be causing more homeowners to lose their home to foreclosure.

In February 2009, the Obama Administration introduced a comprehensive financial stability plan that included help for homeowners - the Home Affordable Modification Program (HAMP).  It is intended to provide eligible homeowners the opportunity to modify their mortgages to make them more affordable.  It has even been extended to help unemployed homeowners and those who are "under water"  on their mortgages.  But, the program may not be all its cracked up to be... it may actually be causing more homeowners to lose their home to foreclosure.

To be eligible for HAMP, the mortgage loan must be secured by a one-to four-unit property which is the owner's primary residence.  Condos, coops, and manufactured homes that are permanently affixed to the real property are also eligible.  The borrower must be in default, at risk of imminent default, or in foreclosure and the borrower must be able to document a financial hardship (e.g. loss of job, divorce or separation, or reduced income).  The loan must have been originated before January 1, 2009.

Participation in the program is required for all eligible Fannie Mae and Freddie Mac portfolios.  Services are prohibited from soliciting borrowers who are less than two payments behind, but if such a borrower contacts the servicer, the program is an option.  The program includes two steps - a three-month trial period and a separate modification agreement.

As incentives to modify mortgages, the servicer receives $1,000 for each borrower who successfully completes the trial period and executes a modification agreement.  An addition $55 is paid to the servicer if the borrower was current but facing imminent default at the time of the modification, and an addition $1,000 annually for up to three years for each borrower who remains in the program.  Under certain conditions, borrowers can receive an annual principal reduction of up to $1,000 for up to five years.

There are no costs to the borrowers and all late charges that accrued prior to the modification must be waived if the borrower successfully completes the trial period.  Accrued interest and out-of-pocket escrow and other advances to third parties can be capitalized.

The borrowers must also verify their income and represent and warrant that they do not have sufficient liquid assets to make their monthly mortgage payments.  In short, it must be determined that the borrower cannot afford their current payments and the program allows for reduction in the interest rate, and extension of the term of the loan for up to 40 years, and forbearance of principal to make the loan affordable. 

Though this all sounds great, after all who could argue with modifying mortgages to help homeowners keep their homes and avoid foreclosure.  However, the program doesn't always work in the homeowners' favor.

One of the problems is that the HAMP trial period requires the homeowner to make reduced payments, sometimes as little as half of their regular mortgage payment.  However, the amount due under the loan isn't reduced and the partial payments are placed in a suspense account pending modification.  Thus, HAMP does nothing to cure a default until the modification agreement is executed.  In many cases, the homeowners are told at the end of the trial period (which is often extended beyond the three month period) that they do not qualify and they are actually further behind than when they started the workout plan. 

The homeowner can do everything as they are instructed by the lender according the terms of the plan and wind up closer to foreclosure once the trial period is over.  Participating in the program is no assurance that they will get the modification they thought was promised.  The trial plan agreement contains vague statements that the homeowners may receive an offer to modify their mortgage, but the servicer is under no duty to modify the loan regardless of homeowners' compliance. 

A look at the statistics for successful HAMP modification is alarming.  As of the end of April 2010, participating services canceled 277,640 three-month trials since the program launched in March 2009, according to the Treasury Department.  That is an 80% increase from the 155,173 total in the previous month.  The main reasons for the cancellations are a missed payments from a homeowner or the servicer determines ineligibility once all documents are submitted.  Often times, the servicer drags out the trial period by requesting more and more documentation, which further increases the homeowners' arrearage.

Canceled permanent modifications are up too. Through April, services canceled 3,744 permanent modifications since HAMP was launched, up from 2,879 the month prior.  These are sue to missed payments since the documentation was already submitted during the trial period.

According to federal data, the program has helped about 300,000 borrowers to get permanent new loans. That is a remarkably low figure, given the 1.2 million trail plans that have been started.  The number of canceled plans is nearly as many of those who have successfully modified their mortgages under the program. 

Earlier this week, three New York residents filed suit against J.P. Morgan Chase & Co. alleging that the bank misled them about their chances of getting long-term reductions in their mortgage payments.  The suit, filed in U.S. District Court for the eastern district of New York, says the three borrowers "relied on promises by [the bank] that they would be able to modify their loans so that they could avoid foreclosure" and so "invested their limited resources" in making payments.

Therein lies the problem.  Borrowers, in good faith, rely on their services for help under a federal program and they aren't clearly warned of the risks of participating.  Even if they do everything that is required of them under the trial period plan, they run the risk of not getting their permanent modification and then find out that they owe more than they did when they started.  If they had any chance of curing their default when they began, they most likely face a certain foreclosure after their trial period ends. With the incentives for servicers, the program seems more apt to benefit them than the homeowners who so desparately need help.

If you are facing foreclosure and are presented with a "work-out" plan, you should consult with an attorney so that you fully understand the risks of participating.  An attorney familiar with the HAMP guidelines can provide you with the information you need to decide how to pursue a mortgage modification and help you keep your home.