Identifying Borrowers Fit for Sustainable Modifications

Servicers navigating through the maze of government and nongovernment programs aiming for sustainable modifications are challenged by the need to identify what borrower segments can be realistically assisted.

First and foremost it is important to keep in mind that loan modifications only help borrowers who have the desire and the ability to make modified payments, and then servicers must keep them engaged in long-term relationships, Terry Couto, partner, Newbold Advisors, said at the SourceMedia Loan Modifications Conference, Dallas.

Modifications do not help the so-called strategic defaulters reacting to negative equity in their house, nor are they the right solution for delinquent borrowers, he said, hence going forward redefaults remain one of the biggest concerns. For example, he added, the OCC and OTS 2Q09 Mortgage Metrics Report about redefault rates among loans modified between 2008-2009 indicate the number of loans 60 or more days delinquent 12 months after they were modified by changes in payment show that payment decreases did not avoid redefaults.

Data show that up to 34% of the borrowers whose monthly payment was reduced by 20% redefaulted.

It is not much lower than the 43% default rate of the borrowers whose payments were reduced by 10%.

Meanwhile, over half, or 50.8% of those with payment decreases of less than 10% redefaulted.

Compared to the redefault rates among borrowers whose monthly payments remained unchanged or increased, at 63.4% and 64.7%, respectively, it is evident that the difference is not very substantial.

Furthermore, he said, there is a performance difference between Home Affordable Modification Program loans and non-HAMP modifications offered by many servicers.

One distinction is that only about 10% of the non-HAMP modifications had principal reduction, yet they have performed better. So the important thing to remember here, Mr. Couto said, is that there are non-HAMP options out there that can best serve at-risk of foreclosure homeowners.

While HAMP was a great start, Todd Emerson, president and CEO of customer credit management nonprofit Springboard, said millions of troubled homeowners do not qualify for HAMP.

And that's because they have lower than 31% mortgage DTI - so unless servicers consider non-HAMP modifications these borrowers represent a servicer's missed opportunity to help avoid foreclosure.

Analysts at Barclays Capital Research, New York, also say that HAMP and TARP have embodied in them incentives and conflicts of interest that are bound to affect the number of loans modified, along with secondary market pricing.

For example, only 50% of borrowers will be eligible for government programs, Sandeep Bordia, Barclays' head of U.S. residential credit strategy, said during a conference call in New York.

In HAMP language, he explained, it means good borrowers are best left alone.

Lenders and servicers need to accept that there is a borrower segment that will default no matter what, and there is the group of borrowers in the middle, who really need help, he said.

"The challenge is to identify these borrower segments."

Primarily overall capacity issues and borrower response have affected the success of the program. He believes however that going forward a larger number of loans will be modified.

"Whatever little information we have for HAMP so far shows the future performance of modifications is greatly affected by borrowers' nonmortgage debt, such as credit card and medical debt," Mr. Bordia said.

Over half of these borrowers have an average debt-to-income ratio of 36.4%, which is much lower than the 67.2% - the DTI seen by analyst as an acceptable average.

And these DTI levels may further deteriorate if the unemployment rate keeps creeping up.

For example, at 10.2% this November, it reached the highest level in 26 years, which will translate into growth in demand for HAMP for unemployed homeowners.

Hope Now alliance executive director Faith Schwartz applauded efforts by the Department of Labor to help unemployed homeowners through cross-collaborative initiatives like the one between Hope Now's unemployment committee, the Department of Labor, Department of the Treasury, Federal Reserve Bank of New York, alliance members and NeighborWorks America.

The partnership's goal is to address the issue of foreclosures with both subprime and prime borrowers and develop a new Web-based unemployment verification tool (www.ows.doleta.gov/unemploy/ben_entitle.asp).

The goal is to help mortgage companies and housing counselors verify a homeowner's unemployment insurance, she said.

"Unemployed homeowners with nine months of unemployment benefits can utilize their unemployment income as another part of determining their qualification for the Making Home Affordable Program."

Both the amount of unemployment income and the duration of the payment are crucial to sustaining homeownership.

"The commitment by the Department of Labor, Department of Treasury and Federal Reserve Bank of New York to work with the mortgage industry and other stakeholders is paramount to working with unemployed homeowners to avoid foreclosure," she said.

Thus far in 2009 collaborative industry efforts have assisted over 2.1 million borrowers with workout solutions, according to Hope Now.

Since March 2008, over 44,000 families have been assisted via Hope Now's 51 face-to-face outreach events that have taken place across the country. Recently nearly 3,400 at-risk homeowners received assistance during two days of the Hope Now alliance's face-to-face borrower outreach workshops in San Diego and Riverside co-sponsored by HAMP and NeighborWorks America.

Eric Selk, director of outreach for Hope Now, said the number "was astounding and truly underscored the foreclosure problem facing so many residents in the region."

Each one of those 3,400 families was able to meet one-on-one with their mortgage servicer or local housing counselor, Hope Now said.