Critics of the government's HAMP program are blaming the Treasury for failing to take into account the massive debt of defaulted mortgage borrowers.
In a four-page letter to the Treasury Department this week, Chris Katopis, the executive director of the Association of Mortgage Investors, asserts that HAMP has largely been a "disappointment" because its default probability model failed to consider the total debt burdens, including credit cards, auto loans and second liens, of defaulted borrowers.
The trade group represents institutional investors holding a combined $300 billion of asset-backed securities at June 30.
Using a front-end debt-to-income ratio "is useless outside the given context" of a borrower's overall debt obligations, Katopis wrote. Another massive problem with HAMP: The model considers the loan-to-value ratio of the first lien but ignores the second.
That "is a critical oversight that was a significant problem in the securitization process that created the financial crisis," he wrote. "The ongoing foreclosure crisis reflects many factors, including an underlying consumer credit crisis."
As the crisis drags on, troubled borrowers' debt loads grow. The Treasury's monthly reports show that the back-end debt-to-income ratio of the average HAMP borrower jumped to 79.9% in June before a loan modification, up from 76.1% in January. After a modification, the average borrower had a 63.7% back-end debt-to-income ratio, up from 59.7% in January.
