It is scary to realize that in spite of how far the US economy has come since the dark days of the Great Recession, the effects never really seem to fade away. Beginning in 2009, the Home Affordable Modification Program (HAMP) provided a window of hope to homeowners drowning in debt. Tens of thousands of mortgage holders were able to reduce their monthly payments and remain in their homes.
This was a great thing. Unfortunately, HAMP was a temporary, five-year fix. Mortgage payments which were reduced to no more than 31% of the holder’s gross monthly income are maturing.
What does this mean for those who took advantage of HAMP? Amanda Alix explained in her post, “Mortgage Resets Are Beginning, and Things Could Get Ugly”:
For most, this means a final monthly payment increase of $196; for some, it could be as high as $1,724, depending upon where the average rate for a 30-year loan sat at the time of the modification.
These painful increases foreshadow a tumultuous road for borrowers. The default risk is staggeringly high. Last year alone, the overall default rate of those who received HAMP modifications between 2009 – 2010 was 28%.
The burden of these defaults has been shouldered by the institutions holding these loans. How? Lending institutions build in cushions, called loan loss reserves. If a borrower defaults, this extra money allows her/him to stay afloat while s/he makes arrangements to recoup her/his losses. Unfortunately, many banks have cut back the amount they place in their loan loss reserve each year.
What does this mean for you as a borrower or potential borrower? Does it mean you should sock your money away in a mattress and keep on renting?
That’s entirely up to you. But before you sleep on your cash, which wouldn’t be all that comfortable, weigh your options. Take a close look at the pros and cons of homeownership. Evaluate why the above-described defaulters are defaulting. Consider your own personal financial situation.
Need help weighing these options? Contact Rob Today!