End of Mod Help Means Michigan Borrowers Will See Their Payments Increase

Thousands of struggling Michigan homeowners who got a break on their mortgage during the financial crisis will get a letter this year with a bit of bad news.

It's a notice that their monthly mortgage payment is going up.

The five-year limit on many federal mortgage-assistance modifications is ending. Interest rates will inch up to more realistic rates. Mortgage payments will go up between $50 and $100 a month initially — and possibly creep up further in a few years. The jumps would vary based on the size of the mortgage and when the mortgage was modified.

After all the interest rate step-ups take place, the cumulative monthly payment increase would be about $200 for a typical loan, according to the Making Home Affordable data.

In Michigan, where about half of the more than 40,000 modified loans come from metro Detroit, the average increase will be $127 a month.

The big question: Has the economic recovery been strong enough to enable many people to afford higher payments? Or could some be heading for trouble again?

"Five years later, we're hoping that many families will have moved into a more stable financial situation. We know that won't be the case for everyone," said Julia Gordon, director of housing finance and policy at the Center for American Progress, a Washington think tank.

The Home Affordable Modification Program began offering mortgage modifications in 2009, and 35,000 modifications nationwide took place that year. Those would have had the first step in the reset process in 2014. More than 850,000 HAMP modifications took place in 2010-13.

This year, homeowners who received HAMP modifications in 2010 will see that first step-up in rates.

Under the original modifications, many people received interest rates as low as 2% for the first five years as a way to avoid foreclosure. HAMP reduced mortgage payments by a median of $544 each month — or 40% for many homeowners.

The rules spelled out that the bargain rate wouldn't last forever. After five years, the rate can adjust up by a maximum of 1% a year. The final fixed rate is capped and could end up close to 5%.

Even after the adjustments, the rate is still better than the old, pre-modification rate that averaged 6.3% for homeowners.

Mark Munzenberger, director of housing and education for GreenPath Debt Solutions in Farmington Hills, said the good news is that notification letters will arrive at least four months before the first rate hike and spell out future rate hikes, too.

"They'll get advance notice. It won't be a shock overnight," Munzenberger said.

Rate hikes

Another plus: The U.S. Treasury Department announced another break late in 2014.

Homeowners are already rewarded for sticking with it and making payments. They see a $1,000-per-year principal reduction for the first five years — or up to $5,000.

Late last year, the Treasury and the Department of Housing and Urban Development said another $5,000 would be added in the sixth year of the modification.

Keith Gumbinger, vice president for HSH.com, a mortgage information website, said taking $10,000 off a mortgage balance would help hold down payments and the pain.

The added equity means that HAMP borrowers could also move closer to being able to cancel their mortgage insurance.

Anne Bussell, 56, of Warren, received a notice last fall that her payment would go up by about $40 a month to $538 a month in March, including money in escrow for property taxes.

Her rate will move from 4.86% to a fixed rate of 5.18%. No other rate hikes will take place.

While many homeowners might not have trouble paying an extra $40 a month, Bussell isn't one of them.

Bussell built up credit card debt after a stroke in 2003. She receives Social Security disability payments.

"I live month to month," she said. "If I stick very straight to my budget, I have $14 at the end of the month."

She doesn't go out to eat and watches her other expenses.

"I don't even have cable or anything," she said.

She ran into troubles after she refinanced her modest home in 2006 for about $65,000 and took equity out to pay credit card and medical bills. She bought her home in 1983 for $14,000.

She owes about $58,000 on her house but she doesn't think her home could sell for more than $15,000 or so now.

The house next door to her, which she said is a cookie-cutter floor plan similar to her home, sold for about $8,000 about three years ago. But an estimate on Zillow.com of her 696-square-foot home is more optimistic and puts the potential price around $35,000.

"People who have lived here for a while are horribly underwater," she said.

Bussell, who once worked as a computer network security analyst, had not heard of the latest HAMP enhancement where an extra $5,000 could be taken off her balance at some point.

"That would be awesome. Anything that's taken off the principal will help me because I'm so underwater," Bussell said.

She's also thankful she didn't refinance to a $90,000 mortgage on her home in 2006, as one lender suggested.

Individual cases

How much the rate resets will hurt will depend on individual situations and neighborhoods.

Did the homeowner take a pay cut and never see his or her wages go up? Or did someone find a good job?

Did home values stay low in the neighborhood? Or go up?

Sunshine Hefferon, a financial counselor at GreenPath in Farmington Hills, said people who obtained modifications need to be warned to expect a letter about rate hikes.

Some people were just so happy to receive any help during the housing collapse that they did not review the terms and don't know about the five-year limit.

"They didn't realize there were going to be any changes," Hefferon said.

By the numbers: Michigan mortgage modifications

The median mortgage rate was 6.5% before modifications in Michigan. It's expected to be 4.8% after the series of step-ups or resets. The median savings would still be about $250 a month from the pre-modification level.

· 40,859: Homeowners in Michigan who obtained loan modifications under the Home Affordable Modification Program.

· 20,000: Homeowners expected to face resets in rates in the years ahead. Some homeowners no longer have those mortgages, having gone into foreclosure or selling the homes.

· $340: Median reduction in monthly mortgage payment, or an average 37% reduction.

· $377: Median reduction in monthly mortgage payment for Detroit-area homes under HAMP. A bit more than half of Michigan mortgages were in metro Detroit.

· $127: Median mortgage payment in Michigan increase after all resets for HAMP modified loans.

©2015 Detroit Free Press. Distributed by Tribune Content Agency

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