Five years after the federal government bailed out more than 1 million struggling homeowners, many who got the relief may end up losing their homes after all.
Already, nearly 30 percent of those who qualified for relief have defaulted again. And roughly 800,000 borrowers who remain enrolled in the government’s flagship program will see their mortgage interest rates gradually rise starting this year — eventually increasing payments by more than $1,000 a month in some cases, according to a recent federal analysis.
As the higher payments kick in, regulators and consumer advocates fear that homeowners won’t be able to stay current on their mortgages, placing an unwelcome strain on the housing market and potentially on economic growth.
“The program was a temporary Band-Aid,” said Greg McBride, a senior financial analyst at Bankrate.com. “Five years later, that Band-Aid is going to be ripped off.”
The initiative was based on the flawed assumption that the economy would bounce back more quickly, undoing the damage wrought by plunging home prices and high unemployment. The program lowered the monthly mortgage payments of qualified borrowers for five years, presumably long enough for them to regain their financial footing.
But since the initiative’s launch in 2009, the average household income has been flat for all but the highest earners. And while home prices have climbed in the past two years, many borrowers continue to owe more on their mortgages than their homes are worth, making it difficult to sell their properties or refinance their way out of trouble.
Obama administration officials defend the Home Affordable Modification Program (HAMP). But they say they are prepared to respond if there is a significant uptick in delinquencies among the homeowners.
The outcome could determine how far the administration is willing to go on behalf of homeowners, experts tracking the issue said. Funding for the initiative came from the $700 billion that the Treasury Department used to bail out banks and other firms considered vital to the nation’s financial stability.
“The question becomes: Will Treasury help them get back on their feet in the same way it helped the banks get back on their feet?” said Christy Romero, the special inspector general for the Troubled Asset Relief Program, which oversees the handling of the bailout money.
There are no reliable projections on how many of the 800,000 borrowers could default once their interest rates rise. But borrowers who qualified for relief were in default or close to it, and many of them may not be much more financially secure than they were when they initially turned to the government for help, some experts said.
Barbara Irving feels vulnerable. Irving said her family is doing better financially but not well enough to withstand a higher loan payment. When times were good, she and her husband were close to selling their home in Texas and moving into a new one they were building. But the housing bubble burst, and suddenly they had two mortgages to juggle.
Unable to keep up with the payments, they lost their first home to foreclosure and got the mortgage on their second home modified through HAMP in 2009, she said. But they recently were notified that the monthly payments eventually would increase by hundreds of dollars.
Now in their 60s, Irving and her husband are earning much less than they were before the economy soured, she said. They cannot refinance or sell, because they owe more on their mortgage than their home is worth.
“We are living on a super-tight budget with only one car and just cannot afford any increase,” said Irving, a housing counselor. “It would be a struggle to make payments.”
Most of the borrowers who qualified for HAMP had their interest rates cut for five years, some to levels as low as 2 percent, so that their mortgage payments did not exceed 31 percent of their gross monthly income. After five years, the rates are supposed to rise by up to a full percentage point a year until they reach whatever the average interest rate was for a 30-year fixed-rate mortgage at the time the loan was modified.
After all the increases take effect, the median monthly payment would rise by about $200 a month, according to a recent analysis of Treasury Department data. But many will face steeper increases. In California and Hawaii, which have a high concentration of HAMP modifications, the median increases will be $300 and $356, respectively. In California, payments will jump by as much as $1,724 in some cases.
About 44,000 borrowers will see their median payments eventually rise by more than $200 in Maryland, Virginia and the District. The maximum increase in Maryland, where foreclosure rates remain high, would be $1,174.
Sandra Mann, a housing counselor at Harcatus Tri-County CAO in Ohio, estimates that 25 percent of the people enrolled in the program in her state are going to face “big problems” when their loans adjust. It’s not just that they might lose their homes, it’s that they might not be able to afford area rentals, Mann said.
“They literally won’t be able to find a place to live, because rent is so expensive here now,” Mann said. “So they’re going to face a double whammy.”
The HAMP borrowers won’t be the only ones dealing with an increase. Many lenders developed loan-modification programs similar to the government’s initiative.
Pauline James, a New York City homeowner, is one of those other borrowers.
In 2010, James lost her job at a bank and her lender agreed to cut her interest rate to 3.6 percent. She and her husband, a city employee, have barely managed to keep up ever since, she said. In December, they learned that their interest rate would increase to 4.6 percent, which it did this month, adding $200 to their monthly payment. It will keep climbing over the next several years, she said.
“I don’t know how this is going to work, because I still don’t have a job,” said James, who was on unemployment and now receives Social Security. She has been trying to modify her loan again without success. “Things have gotten worse, not better. Why do they think I can pay more money?”
Treasury officials say they recognize that HAMP was not perfect. But the program gave homeowners breathing room during the darkest days of the foreclosure crisis, said Timothy Bowler, the department’s acting assistant secretary for financial stability.
If not for the initiative, most of the 800,000 people who face rising mortgage rates would have already lost their homes in a foreclosure or short sale, which enables borrowers to sell their homes for less than what is owed, said Bowler. “The last thing we needed back then was more distressed properties in an already stressed market,” he said.
Bowler also said he is optimistic that the rate resets won’t devastate borrowers.
While the initial re-default rate was high in the early days of the program, the rates have been dramatically lower among borrowers who kept up with their payments for at least a year, suggesting some financial stability, Bowler said.
Some of the borrowers may even transition out of the program with better rates than they had going in, he added. For instance, a borrower who took out a mortgage at 6 percent in 2007 and had that rate slashed to 2 percent in 2010 will eventually end up with the average rate for 2010. That rate: 4.8 percent.
Still, the administration is prepared to respond in a “dynamic” fashion if it senses significant trouble once the loans start resetting later this year, Bowler said.
“Right now, we’re not seeing a lot of data saying that people whose loans have reset are more likely to default after having been current for five years,” Bowler said. “This is an issue we are monitoring closely, and we are determined to stay ahead of the curve.”
The outcome could turn on the strength of the economic recovery and whether the recent gains in home prices can be sustained and even improved, mortgage industry experts said.
The gains in prices, for instance, were fueled by large institutional investors who bought homes in bulk at cheap prices. Investors may retrench now that prices and interest rates are climbing, said Tomasz Piskorski, an associate professor at Columbia University’s business school. Under that scenario, home prices could drop again, and troubled borrowers who face unaffordable resets may not be able to refinance or sell, Piskorski said.
Many consumer advocates have said that the administration should make the loan modifications permanent at the lower rates. But that could be a logistical nightmare for loans that were bundled and sold to investors, Piskorski said.
HAMP has given more than $5 billion to mortgage servicers and investors as incentive to modify loans.
“I think a lot of investors would be very unhappy with extending this program forever,” Piskorski said. “The whole point of HAMP was not just to help borrowers but to help investors preserve money. Investors might prefer foreclosure to getting very low payments for another 10 or 20 years.”