Trying to Make Mods Right

Despite its shortfalls and failure to assist many borrowers in need, the Home Affordable Modification Program may be a private investor's best bet.

Barclays Capital Research analysts have introduced new data that may make it easier for indecisive private investors still considering HAMP versus non-government loan modification financing.

"HAMP is the single modification program that non-agency investors would want to focus on," said Barclays' head of US residential credit strategy, Sandeep Bordia during a conference call in New York.

According to the analyst, a comparative analysis of the performance of HAMP modified loans with pre-HAMP modifications that have been in use for some time shows about 55%-70% of the borrowers holding a modified loan were delinquent after 9 months. In summary, the report finds that up to 80% of the borrowers who are current on their loan today may default.

How much better should HAMP modifications perform compared to pre-HAMP modifications?

"HAMP is more thoughtful than previous loan modification programs," Mr. Bordia said, "but it still leaves some issues unresolved."

For example, the difference between median debt-to-income ratio and the DTI before and after modifications is 15 points. The median DTI is at 36.4% with half of the borrowers ranking below that level. In a best case scenario borrowers must have an average backing in DTI of at least 67.2%, he said. "The point I'm trying to make here is that there's a group of high DTI borrowers even within HAMP who will eventually default."

The analyst expects HAMP redefaults to be at about 15%-20% lower than pre-HAMP modifications.

He warned those who believe the program will be a success saying "it is definitely not the case," since the performance of of modified loans "can't be much better because DTI can go much lower."

Other questions relate to implementation details and implications of government programs. Barclays "Life support: The role of government in mortgage markets" shows performance improved only for modifications on loans with payment reductions of 32% to 40%.

"The performance was much better in mods with higher reductions in payments," he said, adding that it should be considered a good sign that "whatever little information we have for HAMP mods so far it looks like the payment reduction has been in the 30%-40% range."

However, in reality the current modifications are more likely to have received even higher reductions than pre-HAMP modifications.

According to the report before and after loan modification debt-to-income ratio data show that over half of the borrowers were spending about 29% of their income to pay debts other than their first lien mortgage, and half of these did not handle their debts very well. The payment reduction on the first lien for a typical borrower has been at 16% of the borrower's income. Apparently borrowers benefited from other payment reductions in conjunction with a HAMP modification, such as modifying second liens or cuts in payments resulting from the mandatory HUD counseling. Consequently the debt-to-income ratio improved.

A before and after modification loan-to-value overview shows LTVs either stay unchanged or are slightly higher. Consequently performance may improve only within the 15%-20% range, not higher, Mr. Bordia said.

Earlier in October, another Barclays report examined the performance of modified loans.

It stated that during the next few quarters servicers would have to face the prospect of significant increases in the number of loan modifications in times when pre-HAMP modification programs have been almost replaced by HAMP, the new industry standard for first liens - so they need to enhance their operational capabilities and deal with high political pressures.

In September the "State and Local Foreclosure Mediation Programs: Can They Save Homes?" report, which looked at 25 programs in 14 states, raised concerns about expectations from loan modification programs. Geoffrey Walsh, staff attorney with the National Consumer Law Center and author of the report noted that a review of existing programs revealed "ample evidence that investors, as well as homeowners lost substantial amounts of money in every foreclosure." Some studies show up to two-thirds of the value of a particular investment is lost every time a foreclosure is completed, he said. "Homeowners' inability to communicate with the holders of the securitized mortgage obligations has been a significant barrier in implementing affordable and sustainable modifications of those loans - and preventing foreclosures."

A number of new state and local programs that emerged in 2008 require some form of negotiation, mediation or conferences between homeowners and the owners of their mortgage obligation before a foreclosure sale takes place. While these programs have the potential to assist homeowners, Mr. Walsh said. "They suffer from lack of the same industry unaccountability that have plagued the voluntary federal programs created to encourage large scale modifications over the last two years." He added that structural limitations on all these programs do not allow the participation of all the homeowners that could have participated in them.