The Home Affordable Modification Program was a godsend to many troubled homeowners after the financial crisis, allowing tens of thousands of mortgage holders to reduce their monthly payments to no more than 31% of their gross monthly income, often through interest rate reductions.
But, all good things must end, and HAMP – which helped many avoid foreclosure – was only a five-year, temporary fix. Now, modifications that began in February 2009 are maturing out of the program, and into a gradual increase in interest rates. For most, this means a final monthly payment increase of $196; for some, it could be as high as $1,724, depending upon where the average rate for a 30-year loan sat at the time of the modification.
Almost 90% of HAMP loans will see increases
According to the latest report from the Special Inspector General for the Troubled Asset Relief Program, 88% of the nearly 900,000 active HAMP loans will see their payments rise between now and 2021. With many borrowers having their rate reduced to as little as 2%, a 1% per year rise will likely be painful. Some will see their rates reset up to 5.4% over the next few years -- more painful still.
Obviously, the redefault risk is pretty high. As SIGTARP notes, those in the HAMP program the longest default at the highest rate – nearly 50%. Almost half of homeowners with HAMP modifications received them from 2009 to 2010. The overall default rate at the end of last year was 28%.
Which institutions hold these loans? Of the 10 major servicers involved with HAMP, Bank of America Corp. (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo (NYSE:WFC) are in the top five. At the end of 2013, redefaults for each bank associated with HAMP loans was 31% for B of A, 23% for JPMorgan, and 24% for Wells. Ocwen Loan Servicing and Nationstar Mortgage, the other two servicers in the top five, each had redefault rates of 30% and 26%, respectively. Can they expect a whole lot more in the next few years? It certainly seems like it.
The other reset problem: Helocs
In addition to new default risks for HAMP loans, banks are also facing issues with home equity lines of credit made right before the crash, some of which began maturing last year. Once the loan turns 10 years old, these so-called Helocs begin to add principal to the interest-only payments homeowners have been accustomed to paying. For some, those reset payments will be in the neighborhood of $500 to $600 more each month.
The usual suspects mentioned above are the biggest players here, as well. Together, Bank of America, JPMorgan Chase, and Wells Fargo hold big hunks of the total $529 billion in Helocs, with B of A having the biggest portion, $81.4 billion. JPMorgan and Wells hold about $70 billion and $80 billion apiece. Since these loans are usually second liens, banks face bigger losses.
Banks are facing these threats with less of a cushion these days, as well. As their troubled loan portfolios have waned, banks have cut back by billions of dollars on their loan loss reserves. Both Bank of America and Wells, for instance, put aside approximately $5 billion less in 2013 than they did in 2012.
Things could get rough for the big banks again very soon, as defaults start to add up. As far as they've come from the dark days of the financial crisis, the legacy of banking's pre-crisis lending spree never really seems to fade away.