The Massachusetts Division of Banks has issued an opinion concluding that home loan modifications under the federal Home Affordable Mortgage Program (HAMP) do not violate a Massachusetts law allowing loan modifications benefitting the borrower despite the fact that the interest rate on a HAMP program loan can adjust upwards after five years to a rate ultimately higher than the pre-modification rate. In Opinion 09-028, dated January 13, 2010, Massachusetts Deputy Commissioner of Banks and General Counsel Joseph A. Leonard, Jr. reviewed the purposes of the Massachusetts law and the HAMP program and concluded that, because the interest rate on the modified loan in the five-year period following modification is fixed at a lower rate than the interest rate before the modification, the modification is permissible under Massachusetts General Laws Chapter 183, Section 63A. That Massachusetts statute authorizes a lender, including a bank, subject to certain conditions to revise the interest rate on an owner-occupied, one-to four family mortgage loan on a Massachusetts home provided that “the interest rate. . . after any such revision, shall not be in excess of the interest rate on the existing note and mortgage so revised.”
Nutter Notes: The HAMP program offers incentives to lenders (including secondary market purchasers of mortgage loans), servicers and homeowners to modify residential mortgage loans to provide sustainable mortgage payments for borrowers. The program provides, in pertinent part, that the interest rate on certain modified mortgage loans with an adjustable rate must be fixed for the first five years after modification to a lower rate, and then the rate may increase one percentage point per year until it reaches the Freddie Mac Primary Mortgage Market rate for 30-year fixed rate conforming mortgage loans. The Division’s opinion letter determined that the General Court’s intent in enacting Section 63A was to increase loan modifications to assist homeowners in avoiding foreclosure, and that a reduced, fixed interest rate for the first five years after modification benefitted the borrower and would not be a circumvention of the Massachusetts statute simply because of the possibility that the modified rate could at some point in the future adjust upwards to exceed the interest rate in effect prior to the modification.