Dropoff in Loan Mods Caused by Trial Period
In May, HOPE NOW members modified 101,000 mortgages compared to 121,000 in April, which represents a 16.5% drop. Faith Schwartz, the group's executive director, says these changes can be partially attributed to the industry's implementation of the Obama administration's home retention program.
"We're seeing a drop off in loan modifications due to the trial period," said Ms. Schwartz. Under the Home Affordable Modification program, loans are subject to a three-month trial period before a modification can be completed. Therefore, HOPE NOW says a number of workouts that will end up being modifications can currently only be reported as repayment plans or trial modifications. Many of these modifications will result in formal reporting of modifications after 90 days. The organization initiated 148,000 repayment plans in May, up 5.7% from 140,000 in April. May data from HOPE NOW show 60 day plus delinquencies increased from 2.9 million to almost 3 million. Foreclosure starts increased from 243,000 in April to 257,000 in May. Completed foreclosure sales shot up from 63,000 to 83,000.
HOPE NOW and its partners helped 249,000 borrowers stay in their homes during the month. While workouts dipped slightly in May, Ms. Schwartz said she expects those numbers will increase as the industry and the Obama administration implement the program.
"It will get better as mortgage servicers continue to ramp-up to meet consumer needs and address the complexities of the government's home retention efforts," she said.
About 15 of the servicers that have signed on under HAMP are HOPE NOW members. "We are in the middle of trying to bring companies along that have signed up. We want to find out how it's going and give feedback to the government — to Treasury, Fannie and Freddie, FHFA and HUD. This is just another tool for the major servicers," Ms. Schwartz described.
"Some are not offering it. Frankly, I know the ones that aren't might have more aggressive mods because that might be where the affordability falls or it might be a higher housing ratio. Maybe its 38 because that works for that disposable income. But at the end of the day, to me, it's just one more tool to say how many mods are happening or not and what needs to happen based on the state of the market."
HAMP has added some complexity to the capacity issue for servicers, according to Ms. Schwartz.
"What has changed slightly to make it more challenging on capacity is when this plan was announced, it said even if you're current and having hardship, then in fact you are eligible for help. And so, instead of just millions of calls coming in, now you have maybe multiple millions over time because all the current borrowers are interested too. Thirty to 40% of all in-bound calls for a lot of companies are current borrowers. Servicers go through everyone who calls in and many of these people absolutely don't qualify, period.
"Further, the complexities of the HAMP program are much higher than anyone has discussed. "Even what we were doing with Fannie and Freddie — November of last year is not that long ago. We pushed hard for a streamlined approach. Kind of like the FDIC approach — the mod-in-a-box. We said, 'Get an affordability target — X, Y and Z, but we didn't have the extensive documentation requirements. It was all about, 'How do you get through this capacity? Who is eligible, and who is not? Let's push it out.' I thought that was a great step forward," Ms. Schwartz recalls.
The Inspector General of the United States, the FBI, Freddie Mac, Congress, they all will look at this program, because its taxpayer dollars, she said. "I don't have any criticism on that — the only step back is well, that adds complexity. Will that borrower fully document everything or you can't offer the government mod?"
The main focus should be on execution and implementation right now. A recent Fitch report shows 60%-70% of private servicers have loan mods that are redefaulting. What HOPE NOW sees is a little broader. This includes prime and subprime loans as well as portfolio and securitization.
"It's everything. In some ways I don't have that granular approach. Because it's a broader piece. It's not as high on the redefaults. It's ranged from 30%-40%. That's measured as a snapshot after six months, 90 days late. In fact, it's like a regulatory measurement."
You can look at things 30 days late, three months late too, and the numbers can vary. "I'm sure they go up and down. What I would say is because we are dating it back six months, most of the redefaults are prior to any formal roll out of affordability programs."
Think about the systemic rollouts from Fannie and Freddie six moths ago, she pointed out. Did they allow servicers to reduce rates, did they allow them to defer principal? "So, you are looking at old mods. They're not good or bad, but they didn't have affordability targets."
Going forward Ms. Schwartz said she is hopeful the industry will see better, more sustainable mods. However, with the economy deteriorating she does not know if that is going to be the case. "There are all these variables. What's the unemployment rate going to do?"
Currently there are a lot of loans — 3 million loans over 60 days past due. HOPE NOW estimates anywhere between 250,000 — 270,000 workouts are happening — that means repayment plans, that means mods, it's a combination of everything, Ms. Schwartz said.
"If you look just at mods, that's 100,000-125,000 mods. That's the more permanent change to get the borrower on track. You look at the pipeline of what's behind. Of the current borrowers, do we have a handle on whose in trouble? And if you just look at models you might say, one in five are underwater."