May 10
18
Lately there has been a lot of press about the number of people whose HAMP permanent modifications have been turned down for a variety of reasons. Some of those reasons have been good and some have been downright silly. But far more important are some of the other problems HAMP might get a homeowner into.
While a HAMP modification will cap your mortgage payment at 31% of monthly income, there is no cap on the total debt service a family can have each month. It includes things like car payments, credit card minimum payments, student loans, and other debts that must be paid each month, but not things like the power bill or the water bill. This number is known as a Debt to Income Ratio, or DTI for short. Right now, the average DTI is running over 60%. As Tim Iocono helpfully put it:
Yes, that leaves borrowers with 35.9 percent of their income to pay for taxes, utilities, insurance, food, gasoline, clothing, save for retirement, and have some fun from time to time.
It certainly doesn’t account for emergencies like car repairs or water heaters needing replacement. Clearly most families are not in a position to run their lives in this fashion. This is a set-up to a future default, leaving the homeowner even worse off than before.
Another little talked about provision of the program is this: what happens if a permanent modification is denied? Some homeowners are finding out the hard way that they may be asked to cough up a check for the difference between the trial payments and what they have been paying, often thousands of dollars, or immediately be in default. In the meantime, their credit rating has suffered merely by having been in a trial modification.
The bottom line is to think very carefully before asking about a HAMP modification. If you have a financial adviser or a legal adviser, consult them first.
