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WARNING: HAMP Can Drive Homeowners Into Bankruptcy

HAMP Can Drive Homeowners Into Bankruptcy [1]Written by Craig D. Robins, Esq.


This is a continuation of my previous article:  Bankruptcy Issues Involving HAMP (Home Affordable Modification Program) — Part One [2], that I wrote after attending a seminar of the National Association of Chapter 13 Trustees. 
WARNING:  HAMP (Home Affordable Modification Program) Can Actually Drive Homeowners Into Bankruptcy
Here are two types of horror stories I’ve been hearing from some recent clients about their HAMP experiences.
First, the homeowner applies for HAMP relief but does not receive a timely response from their mortgage servicer.  In the meantime, their debt situation becomes worse and worse as they struggle to remain current on their obligations.  This then puts them into an untenable financial situation that they cannot get out of.
Second, some other homeowners have reported to me that they applied for HAMP relief and were granted a temporary modification.  However, several months later, after the trial period ended, they were turned down for permanent relief, leaving them immediately on the hook for catching up with thousands and thousands of dollars in payments that they didn’t make (and now cannot afford to make).
Can I Seek HAMP If I am Defending a Mortgage Foreclosure Proceeding?
You cannot be turned down just because you are actively involved in foreclosure litigation.
What Happens to the Money Saved With Reduced HAMP Mortgage Payments?
There is no “cram-down” on the unpaid principal balance.  In other words, the savings do not disappear.
Even though the homeowner will be saving money by having a reduced monthly mortgage payment, these savings are not forgiven.  The amount of savings is actually set aside as a non-interest-bearing balloon that the homeowner must pay upon sale, refinance or the maturity of the loan.
Apparently, many homeowners are unaware of this aspect.
What Happens to Mortgage Arrears at the Time of a HAMP Modification?
All arrears up to the time the HAMP offer is made, are capitalized into the balance of the modified loan.  They, too, are not eliminated.
How Long do HAMP Reduced Mortgage Payments Last?
The reduced monthly payments are only good for five years.  For each year after that, the interest rate increases by one percent each year until it reaches a certain Freddie Mac cap rate.
New Documentation Program Starts June 1, 2010
One of the existing problems was that a homeowner would apply for a HAMP modification and quickly enter into a trial period of reduced monthly mortgage payments — before complying with all of the document requirements.
Many homeowners would then fail to fulfill the document requirements and, for that reason alone, be turned down for a permanent HAMP modification.
Accordingly, effective June 1, 2010, a HAMP trial modification cannot start until the document requirements have been totally satisfied.
What Are Some HAMP Alternatives?
I wrote about this recently.  See my post:  One-Fourth of All U.S. Homeowners Are Underwater. What Should These Homeowners Do? [3], for a discussion of alternatives.
Seeking Hamp Relief While In Bankruptcy — What Are the Issues?
This topic will be the final part of this series.  I will post it later this week.
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