HAMP 2.0 May Have Limited Impact on Home Foreclosures

by on Foreclosures

The recent changes to the much-criticized Home Affordable Modification Program (HAMP) proposed by the Obama administration may have a limited impact on home foreclosures and homeowners seeking to stop foreclosure, according to some experts in the field.

According to one analyst – Anish Lohokare from BNP Paribas – “This HAMP change should have a muted impact at best”, primarily due to a failure to really address one key player left out of the change: the mortgage loan servicer.

Right now, modifications to HAMP (now called HAMP 2.0 by many) call for a 200% increase in the amount of financial incentives given to lenders who agree to reduce the principal of outstanding mortgages, thus helping stricken homeowners reduce their overall debt load and monthly mortgage payments. This in theory could help many avoid foreclosure by giving them more affordable mortgage payments – but the agreement would also cut into the profit margin for mortgage loan servicers, who typically receive a percentage of the principal as payment.

As a result, many loan servicers refuse to actively participate in the program, and currently there are few overpowering incentives to do so from the federal government (who has not yet taken the controversial step of mandating participation for lenders operating in the U.S.)

Principal reductions are widely thought to be a key component of any successful plan to reduce the number of foreclosure properties that hit the markets each year. By writing down the principal, the bank is not only reducing the monthly payment – thereby giving consumers more money to spend or save each month – but is also lowering the total cost of the home, once interest and capitalization is taken into account.

Not enough lenders are participating, though, and as a result, instead of four million Americans impacted positively by HAMP, only roughly 900,000 have qualified- and less than half have achieved a permanent modification.

The next year will be critical in determining if HAMP 2.0 succeeds and helps to reduce the national foreclosure rate – or if it fails to adequately address the foreclosure crisis on a large enough scale to make a noticeable difference, unlike its previous iteration. The program has only been extended through to 2013, which is not a lot of time to make a noticeable impact.

At some point, in order to have the full impact its designers want it to have, HAMP 2.0 will require some tweaks and adjustments to obtain full participation from all players involved – not just homeowners.