16 March 2010

Mortgage Modifiers Marginal

The HAMP mortgage modification process is mostly modifying mortgages of modest income people who have mortgages far larger than their reasonable ability to repay them and shrinking their payments. But, even as revised most of these individuals would not have qualified for a new mortgage because they are too heavily burdened with debt.

The rule of thumb used to be that your mortgage make up no more than 28% of your income. Coming into the program, the average participants mortgage payment (including principal, interest, taxes, insurance and HOA) is 45% of income and is reduced to 31% of income.

The other rule of thumb used to be that your combined mandatory payments (the mortgage amounts plus mandatory debt payments and alimony and child support) should be no more than 36%-40% of your income. Coming into the program, the average participant has total debt payments of 76% of income which is reduced to about 60% of income.

The average participant has a total income of about $32,433 per year, and comes into the program with an average of $431 a month of money after FICA to spend on non-debt, non-housing expenses, and leaves the program with $879 a month of money left over. Doubling disposal income makes life much more liveable for these families, but still leaves a very thin budget.

In short, they are turning impossible burdens into very difficult to manage burdens. One can expect that many families will redefault or will retain a modified mortgage while discharging other debts in a Chapter 13 bankruptcy.

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