Alternative Home Loan Modifications Outpacing Government HAMP Mortgage Relief Program in Helping Homeowners

In a sign that private enterprise is still much more efficient than government run programs, USA today published a story confirming that private servicers’ alternative home loan modifications are outpacing government sponsored HAMP mortgage modifications. Despite the attention given to the federal government’s $50 billion Home Affordable Modification Program (HAMP), which was designed to lower monthly mortgage payments for five years, the majority of financially distressed homeowners are getting alternative modifications through their lenders without any government involvement. In 2010, servicers completed more than 800,000 alternative mortgage modifications with borrowers, according to Hope Now, a consortium of counseling agencies, servicers and investors. Since its start in spring 2009, HAMP has produced only 389,198. In a report last month, the Government Accountability Office criticized the Treasury Department for not doing enough to ensure that servicers treated all borrowers the same in deciding who would be eligible for a modified mortgage under HAMP.

Most home owners facing foreclosure still believe that their best hope is the government-supported HAMP program that lowers their monthly mortgage payments. However recent reports indicate they’re far more likely to qualify for an alternative modification with their lender that also lowers monthly mortgage payments.

“They’re just now aware of what’s out there. They don’t know about these alternative modifications,” says Duran at ClearPoint Credit Counseling Solutions. “They can’t sleep, they’re very worried. You can hear the tiredness in their voices. It feels so good to me that we’re able to get some kind of modification.” Some homeowners say the banks’ alternative programs have saved their homes. Marilyn Johnston, 78, of Plantation, Fla., had an adjustable-rate mortgage with a 7.25% interest rate on her home. Her husband died four years ago and she began worrying about how to afford the house they built 11 years ago after payments went up in 2012. She applied to her servicer, Wells Fargo, for a mortgage modification. She got one in May that gave her a fixed 4% interest rate for the life of the loan. Her payments dropped from about $5,500 a month to $4,500. “I feel so much more relaxed about being able to keep my home. I’m able to sleep at night,” Johnston says. “I love my house, and I didn’t want to lose my home.”

Alternative vs HAMP mortgage modifications

Unlike HAMP modifications, which the government reports on monthly, far less is known about their alternatives, because they are done privately by lenders using different criteria and methods. The vast majority of alternative or private sector modifications reduce borrowers’ payments, often by reducing interest rates and extending loan terms. That’s a change from the past couple of years when banks offered delinquent borrowers modifications that rolled past-due payments and fees into the new mortgages, leaving borrowers with higher monthly payments. When modifications left loans’ monthly payments unchanged or higher, close to 70% were more than 60 days delinquent a year later, according to a June report by two federal bank regulators, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. But when loans were modified to reduce monthly payments, about 40% were seriously delinquent a year later.

Another factor hampering government programs is that eligibility standards (for HAMP modifications) aren’t clear-cut or applied consistently. That could help explain why servicers’ alternative modifications are outpacing HAMP modifications.

Alternative Home Loan Modification Options
Alternative Home Loan Modification Options (Source: Wells Fargo)

Diane Thompson, a lawyer at the National Consumer Law Center, says there is a concern that homeowners who should qualify for HAMP are frequently being steered into alternative modifications.”The concern is that the private loan modification is inferior. The interest rate is not as low, as some point it goes back to the contract rate, and it doesn’t reduce the payment as low (as HAMP).”

Servicers make more money doing short-term modifications than they do under HAMP, she says. If they don’t reduce principal, which they have to do under HAMP, they get more money. If they do a short-term forbearance, they don’t have to report the loan as delinquent. Some borrowers may have to pay fees to get an alternative modification as well.

Other differences between an alternative modification and a HAMP modification also can be significant. Under HAMP, participating servicers are required to reduce the mortgages to 31% of borrowers’ gross monthly income, and if they keep up their payments for a three-month trial period, they’re supposed to be able to keep that modified mortgage for five years. Some alternative modifications may help the borrower for only a period of months.

If you are facing foreclosure, consider calling your local bank to determine if they can work with you on an alternative modification. Most local and major banks have programs in place that can help you through the home loan modification process.

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