Permanent Mods Still Behind in Trial Race

Data interpretation should not be a matter of perspective, but when comparing the so far negative ratio between trial and permanent modifications the only way to be optimistic is by noting that permanent modifications outpace dropouts -- or as in the case of Hope Now outcomes, that workout solutions outpaced foreclosures.

Recent Home Affordable Modification Program government reports on servicer performance for January show that since the start of the program the total number of active trial and permanent modifications reached 946,735. An additional 61,481, or 6% of all modifications started, canceled from the program.

Loans currently in trial total 830,438 while 117,302 have been permanently modified, or 11.6% of the cumulative HAMP total since inception.

Another 76,000 loans servicers have already been approved for permanent modifications bringing the total to 193,302, or 19.2% of the cumulative HAMP total since inception, up from 12.5% in December 2009.

However, according to Desmond Macauley, managing director at the Royal Bank of Scotland, even though the percentage of loans that have reached permanent modification exceeds the share that have dropped out of the program to date, "this relationship will likely change as redefault rates increase with time after permanent modification."

In other words, unless the overall economy and the job market in particular improve, and eventually home values start to stabilize, redefaults remain a viable threat to sustainable modifications.

Currently, government entities continue to outpace private-label loans that have been modified. GSE loans total 540,383, or 57% of the loans actively on trial or permanently modified, while HAMP mods comprise only 1.7% of all loans owned or guaranteed by the GSEs. Meanwhile private-label loans total 321,851 or 34% of loans actively on trial or permanently modified. HAMP mods comprise almost 6% of all outstanding nonagency first-lien MBS, and portfolio loans total 84,501 or 9% of active HAMP mods.

Mr. Macauley argues that unless this GSE/private-label distribution changes almost 40,000 private-label loans will be permanently modified.

And that should improve cure rates in nonagency loans, as approximately $10 billion of securitized loans return to current status. In agencies, the permanent modifications should increase buyout-related prepayments for loans in MBS pools that have not already been bought out in their trial phase or due to their delinquent status.

These data give hope that in the longer run the better performance of securitized loans will translate into more liquidity entering the market and improved investor confidence.

The cumulative modifications started represent 28% of the 3.4 million loans from participating servicers that are estimated to be eligible and 60-day-plus delinquent as of January. Yet after adjusting for loans that have failed the NPV test or have not met the 31% DTI requirement, the report indicates that only 1.7 million currently delinquent borrowers are left eligible for HAMP, with cumulative modifications started representing 59% of that total.

While all permanent modifications include interest rate reductions, as required in the waterfall process, the bank said, 42% of the permanent mods also include term extension, while 27% include principal forbearance. These changes in the number of permanent mods have brought median front-end debt-to-income ratios to 31% from 45%, as required by the HAMP program, while back-end DTIs have been reduced to 60% from 76%, or "still relatively high."

At yearend 2009 the Hope Now alliance reported that its workout solutions outpaced foreclosures. Hope Now HAMP trial modifications reached 728,000. Overall, the industry helped nearly 5.8 million homeowners avoid foreclosure since Hope Now started data collection in mid-2007.

The number includes servicer/investor loan modifications, repayment plans, extended forbearance, deeds-in-lieu and short sales.

While Hope Now servicers provide other modification and workout solutions for distressed homeowners who do not qualify for HAMP, Hope Now said, unemployment, mortgage delinquencies and the increasing number of homeowners who have negative equity in their homes are critical challenges for extending loan modifications.

Even in places like California where the crisis has hit the hardest there is some improvement. Hope Now testified before the Assembly Select Committee that mortgage workouts for at-risk homeowners in California outpaced foreclosure sales two-by-one. 2010 will be another difficult year. By mid-December nearly 500,000 homeowners were delinquent on their mortgage by 60 days.

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