There is a fair amount of payment shock headed toward select groups of homeowners with mortgages.
The reckoning has already started for people who took out home equity lines of credit a decade ago, when homes were appreciating handsomely. What started as interest-only drawdown periods are now ending, and borrowers must start paying off the loan’s principal and its interest.
Also, starting this fall, the first group of homeowners who received loan modifications under the federal government’s Home Affordable Modification Program are going to see their monthly mortgage payments increase as the interest rates on their loans move up. Illinois, California, Florida and New York are the states most affected by the coming changes.
HAMP provided a lifeline for financially distressed homeowners because if a borrower qualified, the monthly mortgage payments were cut to equal 31 percent of their monthly gross income and the primary way to get there was by cutting mortgage interest rates to as low as 2 percent.
More Top Picks Best Digital Voice Recorders
Five years after the modifications were made, the interest rates gradually reset, by increases of 1 percent annually to the level that average primary interest rates were at the time of the modification. Eventually, rates of some borrowers who were among HAMP’s earliest participants will be pushed to just over the 5 percent mark, which is higher than the current average interest rates on 30-year, fixed-rate mortgages.
The Office of the Special Inspector General for the Troubled Asset Relief Program, a federal watchdog agency, has estimated that about 33,000 borrowers will see their first resets this year. While the median monthly payment increase will be $200 at the end of the process, some borrowers will see their payments jump by more than $1,700 monthly, according to the agency.
In Illinois, according to the Treasury Department, the median interest rate paid by HAMP participants before a modification was 6.5 percent, and the median monthly principal and interest payment should increase by about $80 as a result of the first rate increase.
Opinions differ on whether borrowers will be able to handle those increases or whether they will send mortgages into default and dent the market’s recovery. On a national level, the housing market and the economy are in better shape than they were five years ago, and there are other modification programs available for eligible borrowers unable to make the higher payments.
A research brief issued in the spring by the Urban Institute concluded that “fears of massive re-defaults are overblown.”
But the concerns are greater in the Chicago area, where the jobless rate and the housing market have been slower to recover. Local housing counseling agencies, which helped homeowners obtain the loan modifications, hope consumers remember about the resets and are in better financial shape now and able to afford the higher payments.
“Half of all owners with resets are in four states, and Illinois is one of them,” said Becca Goldstein, director of innovation, evaluation and public policy at Neighborhood Housing Services of Chicago Inc. “They may be able to keep up with the increase. Our experience has shown us that even a modest increase can really be devastating to some households.”
The first batch of borrowers to face resets should have already received letters detailing the pending payment change. The Treasury Department requires mortgage servicers to provide borrowers 120 days’ notice of any coming reset and another notice 60 to 75 days before the first stepped-up payment is due.
Housing counseling agencies hope that borrowers who receive the reset letters come see them, to determine how the higher payments fit into household budgets and, if they can’t, to pursue other alternatives. If a borrower was able to keep current on his or her lower mortgage payments, it’s unlikely that counselors or servicers have had much contact with the borrower during the past few years.
The Spanish Coalition for Housing has started its outreach campaign on the issue with its past clients. “Some people are surprised because they didn’t understand or they forgot about the terms,” said Gerardo Ravelo, manager of the coalition’s office on the North Side. “We would love them to come back so we can show them what this change is going to do.”
Twitter @mepodmolik