A Commitment to Making Modifications Successful
As part of our commitment to make HAMP a success, we welcome the opportunity to share with the subcommittee our recommendations for program enhancements, as follows.
* Lower the required debt-to-income ratio below 31% or utilize a "residual income approach" to determine true affordability.
Essential components of the HAMP program are the financial incentives for borrowers, investors and servicers who participate, but those incentives do not apply to modifications where the monthly mortgage payment is less than 31% of the homeowner's monthly gross income.
One out of every four HAMP applicants we see already has or would need to be modified to a debt-to-income ratio below 31%. This is typically the result in cases involving families struggling with higher household expenses for food, clothing, education and the like.
To ensure these families are not excluded, we recommend HAMP be amended to permit use of a flexible residual income approach to determine true affordability on a case-by-case basis.
Under that method, the totality of the homeowner's particular facts and financial circumstances is evaluated, specifically including household expenses.
The monthly payment is then reduced to whatever amount that homeowner can actually afford, so long as the modification remains NPV-positive for the investor.
Alternatively, if the residual income approach is deemed too difficult to administer, HAMP guidelines could be changed to provide either an across-the-board DTI of 28% or a sliding scale that cascades below 31% based on the number of dependents reported on the borrower's latest tax return.
* More effective use of principal reduction modifications to overcome the negative equity problem.
Despite signs of the housing market stabilizing in certain areas, a primary driver of defaults on mortgages - and redefaults on modified mortgages-continues to be negative equity. First American CoreLogic reports that 10.7 million mortgages, or 23%, are currently "underwater," that is, the amount owed on the loan is greater than the market value of the house.
Another 2.3 million are approaching negative equity, i.e., less than 5% equity.
In Ocwen's experience, negative equity increases the chance of redefault by 1.5 to 2 times. The tendency to redefault is particularly severe at LTVs over 125%.
Accordingly, approximately 15% of all of Ocwen's loan modifications since the onset of the mortgage crisis have involved some element of principal reduction. The redefault rates on our principal reduction modifications are at the same low levels as our other modifications, about half the industry average.
More frequent and effective use of principal reduction is needed to rectify the negative equity problem. While HAMP includes principal forbearance as part of the modification waterfall, there is no requirement for principal forgiveness.
More research is needed, however, to determine the extent to which forgiving principal upfront in fact results in lowering redefaults or raising NPVs.
For example, it may be better to utilize "step principal forgiveness," that is, incremental principal reductions over time depending on the loan remaining current. This and other approaches to negative equity should be pilot tested for possible larger scale deployment under HAMP.
An important policy issue that arises in connection with principal reductions is whether they risk creating a "moral hazard," i.e., why let reckless borrowers off the hook while responsible taxpayers are stuck with the tab?
This is indeed a sensitive issue, but we would point out that a foreclosure hurts not only the family who loses their home, it also negatively impacts surrounding property values, reduces the tax base for municipalities and creates a blight on the neighborhoods, all to the detriment of responsible taxpayers. To prevent short-term windfalls, however, any principal forgiven should be retroactively reinstated if the homeowner sells the house and prepays the mortgage within a stated period, say five years. This rule should not apply in cases of relocation needed for employment purposes.
* Additional funding should be made available through HAMP for nonprofit housing counseling and homeowner advocacy groups. Instrumental to Ocwen's success in foreclosure prevention is the assistance provided by our nonprofit consumer advocacy partners all around the country. When for whatever reason a homeowner in distress does not respond to our letters or phone calls, we are unable to help them.
Through grassroots outreach and educational initiatives, community and faith-based groups and so many others have greatly assisted us in making that key communication link with our customers.
HAMP currently provides support for HUD-certified counseling for homeowners in the program with a total DTI ratio of 55% or more. We urge expansion of financial support for any HUD-certified nonprofit organization assisting homeowners through a successful permanent modification under HAMP.
* HAMP should be expanded for successful long term modifications.
The foreclosure prevention objectives of HAMP would be well served if the program were expanded to provide financial incentives for loan modifications completed for homeowners who have a financial hardship, but for other reasons technically do not qualify under HAMP, such as their current DTI being below 31%.
Specifically, servicers should receive a HAMP incentive if they modify owner-occupied loans within 90 days after a HAMP denial and the homeowner remains current on the modification and stays in the home for at least 18 months. Additional success fees would be earned if the homeowner thereafter remains current for a second and third 18-month period.
* Underperforming HAMP servicers should be required to outsource to performing servicers.
Ultimately, HAMP will be successful only if participating banks and servicers are willing and able to deliver permanent modifications in sufficient volumes to make a material impact on foreclosure prevention. Whether for lack of effort, conflicts in protecting second-lien holdings or simply insufficient capacity to execute lasting solutions, a number of banks participating in HAMP are not producing the results expected under the program.
HAMP should be amended to permit Treasury to transfer servicing, in whatever volumes are needed to achieve program goals, to servicers with proven track records and scalable capacity available to execute and convert trial modifications to permanent solutions, and to do so quickly.
* Increase consumer awareness of HAMP and its criteria for participation through more national media advertising.
In order to continue the momentum of getting more struggling borrowers into the HAMP program, we believe that more national media advertising by the administration is needed. Ocwen was one of the earliest supporters of the HAMP program when it was first announced by the administration.
We believe it was then and continues to be a decisive and well-designed response to the mortgage crisis.
The Treasury Department has aggressively implemented the program, having successfully signed up approximately 90% of the industry's banks and servicers as HAMP participants.
Even so, almost a year into the program, too many homeowners facing foreclosure continue to have difficulties obtaining loan modifications.
In our view, this is due in large part to a lack of sufficient capacity and expertise in the industry to effectively handle the unprecedented numbers of distressed homeowners in need of assistance.
Ronald Faris is the president of Ocwen Financial Corp., West Palm Beach, Fla.