The Home Affordable Modification Program (HAMP) from the U.S. Treasury Department is a plan that some critics fear might be a repeat of prior shaky home loan programs in the past. HAMP pays cash incentives to reduce mortgage payments for homeowner’s who are struggling.

However, the program doesn’t reduce the loan amount. It can leave borrowers owing much more than the home is worth. Plus the low rates can increase again in the future.

A HAMP spokesperson suggested that the loans “provide immediate relief to homeowners who have suffered a recent financial hardship.”

The HAMP Process

The HAMP program offers $1,000 per year to the borrower, mortgage servicing firm and the loan holder as an incentive to redo the monthly payments and make them lower. The borrowers are qualified if they’ve suffered a financial setback but have the income to make the payments if the payments are lowered.

The lenders then go through a series of steps designed to set the borrower’s monthly payments to 31% of their monthly income. The loans get converted into fixed rates. If that doesn’t lower the payment enough, the lenders reduce the interest rates. If the payment is still not low enough, the loans are extended for 40 years. Finally, the principal repayment will be delayed. However, that balance will eventually have to be repaid.

Right now, HAMP has had 1.1 million applicants. But only 5.6% of those have been converted to permanent loan modifications.

Critics suggest that while the plan can buy time, it cannot bring back the value of a home. And as of right now, there is no federal plan to address the negative equity issues inherent in these loans.

Photo via Mark Strozier