What is the 3 Month Trial Loan Modification in the Making Home Affordable Program?

by tammy on June 29, 2010

The Making Home Affordable Program (MHA, makinghomeaffordable.gov) is an initiative launched by the Obama administration that is meant to help with the housing crisis that developed after the crash of the residential housing market in the United States back in 2008. In part it is an extension of some of the measures taken at the very end of the previous administration, though it has expanded into a much larger and more complex program today. In fact, MHA is now an umbrella program that oversees a range of different options that distressed home owners can use to help them resolve their housing issues in one way or another.

One of the various options permitted under the MHA is the Housing Affordable Modification Program (HAMP), which was one of the earliest options offered through the MHA. This is essentially a government sponsored loan modification arrangement. On the borrower’s side, the program is administrated by the U.S. Department of Housing and Urban Development (HUD) and on the lender’s side the program is administrated by the Treasury Department. The basic idea is to allow distressed homebuyers to modify the terms of their original mortgage loan so that they are not spending more than thirty-one percent of the monthly gross income on their mortgage payment. Despite the role of the government, the lenders are not obligated to accept loan modifications; therefore they are offered a range of additional incentives directly from the government in order to do so like cash payments.

Regardless of the specific details of any particular case, any loan modification – through HAMP or otherwise – is detrimental to the interests of the lenders since it means that either they will receive the money owed over a longer period of time than originally agreed or they will receive less money than originally agreed. As a consequence, the lenders felt it was important that this fact should be reported on the borrower’s credit report. After all, the borrower cannot qualify for HAMP unless they are facing serious financial hardship and lenders should be aware of this fact. Further, since those that qualify for HAMP are facing serious financial problems, the lenders wanted to be certain that the borrowers could meet the new terms of the modified mortgage loan before accepting this change. Both of these concerns led to the creation of a three month trial period under HAMP.

Once an applicant under HAMP is approved, there is a three month trial period in which the borrower pays the new, adjusted mortgage payment that would apply if the HAMP modification goes through, although the actual mortgage has not been modified yet. Ostensibly this is meant to reassure the lender than the borrower is able to make the new payments, but in reality it plays a couple additional roles as well. First, these three monthly payments at the reduced amount are listed as partial, incomplete payments on the borrower’s credit report; thereby causing a lot of significant damage to their credit score. Secondly, this is the period in which the lender receives all of the borrower’s documentation detailing their financial difficulties, so if the borrower cannot document that they qualify for HAMP properly the lender can refuse to implement the loan modifications.

Leave a Comment

Previous post:

Next post: