The expansion of the Home Affordable Modification Program is getting a lot of applause even though judging from past performance it may not get a standing ovation when the new deadline expires in December 2013.
The joint announcement of the U.S. Treasury and Department of Housing and Urban Development to expand and extend HAMP “is strongly applauded” by the Homeownership Preservation Foundation, said Colleen Hernandez, the nonprofit’s CEO, given projections that foreclosure activity will increase in 2012 and currently millions of distressed homeowners are in desperate need of meaningful assistance. “HAMP expansions are good news for everyone.”
Faith Schwartz, executive director of Hope Now, also called the expansion of HAMP qualifying criteria and deadline “the appropriate course of action.” She applauded HAMP “for establishing a standardized process” that allows mortgage servicers to determine the proper solution for each foreclosure risk case, whether it is a HAMP modification, proprietary modification or short-term solution.
“HAMP’s success is critical to the recovery of the housing market and the economy as a whole,” Schwartz said.
Nonetheless data show the impact of HAMP was less significant compared to the non-HAMP activity. Since 2007 when the voluntary, private sector alliance started reporting data, of the total 5.13 million loan modifications completed by the mortgage industry only 900,000 were under HAMP—compared to about 4.22 million proprietary modifications.
Keefe, Bruyette & Woods analysts were cautious about the overall impact of HAMP 2.0 going forward stating it should be “either a neutral or positive to the mortgage industry.”
For customers, they wrote, the outcome will be “a fairly meaningful pick-up in HAMP modifications,” due to the more flexible debt-to-income ratio requirements and the inclusion of some investor properties that will open the door to about 1.5 million additional borrowers who previously were ineligible for HAMP.
According to KBW calculations, this newly acquired eligibility for HAMP represents almost double the number of current permanent HAMP modifications.
Data suggest 500,000 loans were not eligible because they were investor properties, 800,000 loans were not eligible because of DTI below 31%, and 200,000 loans were not eligible because of negative NPV since HAMP modifications are subject to an NPV test. “Even if a small percentage of these newly eligible borrowers qualifies,” analysts wrote, an increase in HAMP modifications “could be meaningful.”
At the end of November 2011, there were 751,000 active permanent HAMP modifications and 910,000 permanent HAMP modifications had been started—so if the average loan size was at $160,000 than about $120 billion of mortgages are currently in permanent HAMP modifications and another $26 billion redefaulted.
The debate over what type of incentive works best in the long run is still open.
Hope Now reported that since December 2009 up to 80% of proprietary modifications completed included reduced principal and interest payments indicating this option has helped sustain more completed modifications.
“Principal reduction incentives being introduced will undoubtedly help” facilitate the outcome, Hernandez said.
KBW analysts, however, see the HAMP principal reduction alternative as a framework under which servicers are required to consider the NPV of modification with and without principal reduction that has a big problem: The GSEs are not participating even though GSE loans account for over 50% of HAMP modifications.
At the end of November, 36,545 HAMP modifications with principal reduction were active representing about 4% of active permanent modifications. The median principal amount reduced was $66,000, which equated to 31% of principal.
A meaningful positive for mortgage servicers is the increase of incentive fees for permanent modifications from $1,000 to $1,500. The example of Ocwen, analysts wrote, indicates how significant it can be. For example, during the first nine months of 2011, HAMP incentive fees totaled $28.3 million for Ocwen, which using a 35% tax rate, equates to $0.17 a share, and equaled 20% of Ocwen's operating earnings.
Analysts do not expect the new HAMP will affect prepayments, the mortgage-backed securities market and the agency MBS REITs because loans are eligible for HAMP only if they are already delinquent so seriously delinquent loans are already purchased out of agency MBS pools. It will, on the other hand, help nonagency MBS investors, mortgage insurers and bond insurers as the primary holders of mortgage credit risk.