Interest rate resets on many home loan modifications and home equity lines of credit seem to be on a collision course that may create a hardship for many borrowers who didn't expect to be so vulnerable.
HELOC originations peaked in 2005 and most of those second liens are due to reset in 2015. The peak year for first-lien modifications was in 2010 and most of those proprietary and government-sponsored modifications are also due to reset in 2015.
A simultaneous hike in the monthly payments of both first and second liens is "sort of a double whammy," says Aaron Horvath, a senior vice president at Springboard Nonprofit Consumer Credit Management in Riverside, Calif.
Homeowners will have to tighten their budgets to afford the higher payments, which is where housing counseling can play an important role, says Horvath. But for some borrowers who have been barely able to make reduced mortgage payments, the resets "could be the straw that breaks the camel's back," he says.
The Treasury Department launched its Home Affordable Modification Program in 2009 and modification activity peaked in 2010, when servicers completed 512,700 workouts. At the time, the prevailing mortgage rate was 5%, but servicers reduced the borrowers' rates to 2% to make payments more affordable. The terms of HAMP mods include rate resets after five years, in 100 basis point annual increments — meaning that by 2015, those HAMP mods from 2010 could experience the first of three annual 100-basis point resets to bring the interest rate up to 5%.
With a 100-basis point step up in the rate, the median monthly payment increase is about $95 each year, with the majority of HAMP borrowers experiencing two to three rate increases, according to Treasury estimates.
"This step-up concept works well when borrowers are experiencing income growth," Horvath says. "But many borrowers have not experienced wage increases and some are still underwater on their mortgages."
Meanwhile, a HELOC rate reset could add another $100 to $300 to a borrower's monthly mortgage obligations.
The Hope Now Alliance of mortgage servicers completed 1.2 million proprietary mods in 2010. Most of these proprietary modifications have HAMP-like features with a five-year reset and 100-bp step up in annual rates, according to Hope Now executive director Eric Selk. "As investors and lenders did more modifications, the features of later vintage modifications changed over time," he says.
A spokesman for Wells Fargo, the industry's largest servicer, says the bank is "currently reaching out to customers five months prior to the effective date of their interest rate change and then send a reminder communication two and one half months before the change becomes effective" under HAMP.
Under Consumer Financial Protection Bureau rules, servicers must notify borrowers of a reset 120 days in advance. This notice must include contact information for borrowers to contact housing counselors for advice and assistance.
"There are going to be millions of people dealing with these resets" over the next few years, Horvath says. "The good news is that the servicers' infrastructure is in place. The housing counselors are staffed up. All that stuff is in place. It will not be quite the chaos that we dealt with in 2009." Springboard has provided one-on-one counseling to over 300,000 homeowners across the country.
In May, Hope Now servicers completed 11,770 new HAMP mods and 24,900 new proprietary mods. The Treasury Department recently extended the HAMP program through year-end 2016.
Many HAMP borrowers facing rate increases may qualify for alternative modifications, including a HAMP Tier 2 which offers borrowers a fixed rate based on the current mortgage rate and a new 40-year term. The current mortgage rate on a HAMP Tier 2 mod is 4.25%
Treasury officials wanted to keep this option open for the borrowers facing resets, which is one reason the department extended the HAMP program through 2016.