Switching Focus From HAMP to Proprietary Mods

The relevance of HAMP has already started to ebb and flow like a tide.

Market insiders reiterate that servicers are moving their focus on how to assist borrowers outside of Home Affordable Modification Program even though future expectations also include some HAMP growth by yearend and beyond.

GMAC ResCap vice president of loss mitigation, Katie Brewer sees future loan modification growth coming from the proprietary or on-HAMP modification market, "which do not get nearly as much press as HAMP modifications."

Like Brewer other executives expect this non-HAMP growth mode trend to continue in the longer run.

According to CEO of Zelman & Associates Ivy Zelman says research and market developments show HAMP "is loosing steam."

And market data support her claim. At present despite improvements HAMP is not yet stabilized and continues to challenge servicer efforts to implement it. In addition, millions of distressed homeowners who do not qualify for HAMP still need assistance.

Hope Now reports that in June, two thirds of over 174,000 loan modifications finalized were proprietary loan modifications offered to homeowners who did not qualify for HAMP.

Mortgage servicers completed 51,205 HAMP modifications and 123,150 proprietary loan modifications, up 10% from the 112,088 completed in May. Also in June other retention plans completed increased 12% from 74,004 in May to 83,222.

In May Moody's Frank Wissman reported that while about 195,000 trial modifications were cancelled by the top eight largest servicers participating in HAMP - up to 50% of these cancelled solutions received an alternative modification, fewer than 10% moved into foreclosure.

Reasons behind trial-modification cancellations start with borrowers' inability to comply with HAMP eligibility requirements and the fact that 70% of these borrowers had been in trial for 6 months or longer.

Barclays Capital also finds that while "the pace of new modifications decreased" current to delinquent rates increased across the board in July as 30-day to current cure rates dropped for a second month in a row. At the same time 60+ days delinquent to foreclosure rates increased and foreclosure to REO and REO to liquidation rates declined.

Analysts said the slowdown in modification activity continued in subprime and Alt-A, "Although the pace of slowdown was much lower" than in June.

"As expected" servicers were running out of HAMP-eligible delinquent loans, so it will take some time before "modifications might increase again for a few months."

Plus, as the focus is mostly on resolving trial modifications and a large number of HAMP rejections, modification related cures have dropped off.

The increase in conversion to foreclosure from deep delinquency in part happens because of a pick-up in the number of rejected trial modifications, analysts said.

Barclays deems the industry "preparation for the revised HAMP program" as one of the possible reasons why there was a reduction in foreclosure and REO resolutions.

Analysts note that servicers "may also be retooling their operations, thus leading to a temporary slowdown," as they prepare for the launch and implementation of a revised HAMP with debt forgiveness. (So far, the share of rate reduction modifications remains at close to 90%, with the exception of option ARM modifications that feature 30-40% principal forbearance modifications.)

At least one major player in the government sponsored modification market also sees the slowdown as temporary.

Citigroup's senior vice president of loss mitigation Bryan Bolton expects HAMP will pick up steam when employment rates improve -which judging from the current still stagnant job market and unemployment rates may happen later rather than sooner.

During a recent SourceMedia conference Bolton stated that borrowers who qualified and kept their modified loan current during tough economic times, need another mortgage review when they find new employment probably by yearend or the beginning of 2011.

Changes in borrowers' income levels will cause "an uptick in modifications," he said.

In the meanwhile re-defaults can affect the direction the modification market takes.

Mostly due to an improvement in the broader macro and housing environment, Barclays said, re-default rates improved for loans modified in 4Q09 --which are performing better featuring less than half the re-default rates experienced by loans modified in 4Q08.

But the fact that over 60% of the loans modified in the first quarter of 2009 have already turned delinquent indicates that more demand for proprietary modifications or short sales may come into the pipelines.

In addition, there appears to be a consensus that HAMP has driven and may continue to drive innovation in mortgage servicing as lenders figure out what solutions generate mutual benefits to them and the homeowner clients. One such example is that by requiring more documentation and front-end borrower information HAMP has also helped decrease recidivism rates and continues to bring borrowers to the negotiating table.