Servicers Ramp Up for Resets

HAMP interest rates adjust as program reaches five-year anniversary

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The mortgage industry hits a major milestone later this year as the federal government’s Home Affordable Modification Program™ (HAMP) reaches its five-year anniversary and the interest rates on some HAMP loans, including Fannie Mae HAMP™ loans, will start to “adjust” (increase).

When these loans were modified, the interest rate was reduced to a below-market rate (as low as 2%) for a set period of time (generally five years). However, that interest rate will now rise annually by a maximum of 1% per year, until it reaches a “cap” rate which was based on the Freddie Mac Weekly Primary Mortgage Market Survey Rate for 30-year fixed-rate conforming mortgage loans, rounded to the nearest 0.125%, as of the date that the modification agreement was prepared. After the interest rate cap is reached, the interest rate remains fixed for the life of the loan.

How Many and How Much?

To help an anticipated tens of thousands of homeowners plan for increases to their monthly mortgage payments, Fannie Mae issued Servicing Guide Announcement SVC-2014-01 wherein servicers were directed to notify affected homeowners well in advance of the change. “Homeowners who have been paying their mortgages on time may not have looked at their modification paperwork in years and may need to be reminded about the upcoming increases,” explained Bill Cleary, Fannie Mae’s vice president of Credit Portfolio Strategy.

The increases will be spread over a number of years, which will help homeowners adapt to modest payment increases. Adds Cleary: “Our goal is to have servicers reach out early, well before the increase happens, so if the homeowner needs to, they can seek assistance with budgeting for the multi-year impact.”

The Fannie Mae guidance goes into effect April 1, but servicers can implement sooner.

In accordance with the Servicing Alignment Initiative, Freddie Mac issued its rate reset guidance in January, as well.

Reaching Out

Fannie Mae’s announcement is not just for resetting HAMP loans, but for all mortgage loan modifications owned by Fannie Mae with a step interest rate adjustment. The focus is on communication, specifically directing servicers to send written notification to homeowners at least twice preceding the first interest rate increase—at 90 to 150 days and 75 to 60 days out. After that, homeowners must be reminded at least annually.

Guidance on what is required to be included in the notice is published on Fannie Mae’s website. Additionally, Fannie Mae has sample letters available and offers telephone scripting through its Know Your Options Customer CARE program to help agents discuss the step interest rate adjustment, said William Diouf, a product development manager in Fannie Mae’s Customer CARE program.

Fannie Mae’s Perspective

Notifying affected homeowners early—before their loan interest rate increases—gives them more time to contact their servicer or a housing counselor with questions about their loan.

“Servicers can help homeowners understand their payment options and whether they would benefit by staying the course with their modified loan or should consider another option, like refinancing under the government’s Home Affordable Refinance Program (HARP),” Richard Plotnick, a director in Fannie Mae’s Credit division supporting the Making Home Affordable™ program explained.

According to Plotnick, it’s important that servicers try to reach out “sooner rather than later” and “over communicate.” “There’s really no reason these notifications can’t begin right away to help homeowners understand what to expect with their loan payments in the coming years, especially if they may want to take action and find out their options,” he noted.  

For additional assistance with homeowner notification requirements, please contact your Fannie Mae servicing representative.

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