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Can you really get 2% interest rate under HAMP loan modification?

by Dorota Trzeciecka on June 15th, 2010

The answer is, maybe.  It depends on the results of the  “waterfall” calculation.

You may have heard, or may have read, about a government  loan modification program offering 2% interest rate on mortgage loans.   In reality, what the government’s Home Affordable Modification Program (HAMP) proposes is a gradual reduction in interest rate to no lower than 2%.   Under the program, your mortgage servicer uses a step down method, gradually reducing your current interest rate, from let’s say 8.50%, in 0.125% increments, until it achieves a payment amount that would pay out the outstanding principal balance of your loan first in 30 years; if 30-year term does not work, then in 40 years.   This method is sometimes referred to as “waterfall” calculation.   As soon as the servicer achieves this goal, be it at 6% or 5%,  the service will stop the rate reduction;  this will be a new interest rate on your modified 30-year or 40-year loan.  Note that the mortgage servicer is making two adjustments at the same time to achieve the desired new mortgage payment (NMP) amount, the incremental lowering of the interest rate and the extension of the term of your mortgage.      

If, after reducing the interest rate to 2%, the principal balance on your loan is too large to be paid within 40 years, the servicer may then determine what principal can be repaid over 40 years, using the new mortgage payment (NMP) at 2 % interest.  That amount will be your new loan principal that will be paid on the modified 40-year loan at 2% interest.   The mortgage servicer will not forgive the remaining unpaid principal balance; in general, there are no write downs, or so called “cram downs” of principal balance of your mortgage.  The unpaid principal (or as HAMP calls it, “principal forbearance”) can be set aside as a non-interest bearing balloon that will be paid upon sale, refinance, or the maturity of the loan.   

The NMP will last for five years.  For each year after that, the interest rate will increase by 1% (and so will the payment) until it reaches Freddie Mac Primary Mortgage Survey Rate (PMMS) in effect at the time of the original loan modification.  For rates, see http:/www.freddiemac.com/pmms 

The mortgage arrears

What happens to the past due payments, interest and costs that have accumulated on your mortgage?  All the arrears up to the modification offer, including the unpaid principal, interest, attorneys’ fees and other costs, are added to the balance of the loan, and extended over the term of the new loan. 

You are now a  step closer, but still one last step away from modification.  Before the mortgage servicer approves your request for modification, it will perform the Net Present Value Test.

From → Foreclosure