WASHINGTON (AP) — Homeowners whose mortgages were modified to stave off foreclosure could next year receive an additional $5,000 reduction in their loans from the government, the Treasury and Housing and Urban Development departments said Thursday.
The payments would impact roughly 1 million borrowers who received reduced mortgage rates through the Home Affordable Modification Program during the Great Recession. The discounted 2 percent mortgage rates are scheduled to rise by a percentage point for many of these borrowers entering the sixth year of the program. That would increase monthly payments for those who might still be struggling to find work or additional income.
The plan announced Thursday is designed to mute the shock from higher interest rates — and thus higher monthly payments — on HAMP borrowers. Nearly two-thirds of the program’s borrowers have less than 20 percent equity or owe more on their mortgages than their homes are worth, putting them in a fragile financial situation.
“It’s about trying to prevent as many avoidable foreclosures as we can,” said Timothy Bowler, deputy assistant Treasury secretary for financial stability.
Mortgage rates on the modified loans will eventually rise to market levels.
This latest principal reduction would be in addition to the $5,000 in government payments made during the first five years of the loan modification. Because of the combined $10,000 in principal reduction, qualifying borrowers would have the option of adjusting their mortgage terms to pay on average $50 less a month. Otherwise, those borrowers could repay their mortgages ahead of schedule.
The HAMP program was launched in 2009 amid cratering home prices and fierce job cuts during the worst economic downturn since the 1930s. Obama administration officials initially pledged that HAMP could save as many as 4 million homeowners from foreclosure, but only 1.2 million were ultimately able to participate in the program established through the 2008 law creating the Troubled Asset Relief Program, or TARP.