The Home Affordable Modification Program has been very selective in providing relief to homeowners, but its limited access has resulted in a low redefault rate.
HAMP has helped nearly 400,000 struggling borrowers reduce their mortgage payments to 31% of income as part of a permanent modification.
Expectations were much higher when the program was launched last summer, but new figures released by the Treasury Department say its redefault ratio is much better than proprietary private sector modifications.
The percentage of HAMP restructurings that are 90 days or more past due is "very low," said Treasury assistant secretary Herb Allison.
The new figures show that the redefault rate on 4,150 HAMP modifications completed in the third quarter of 2009 is only 2.3% after six months.
The redefault rate on all loan modifications made during the third quarter of 2009 was 20% after six months, according to figures compiled by the Office of the Comptroller of the Currency and Office of Thrift Supervision in their 1Q Mortgage Metrics Report. (The OCC and OTS collect redefault data from the 12 largest banks and thrifts, which reflects the performance of their proprietary modification programs.)
Moody's Analytics chief economist Mark Zandi said the HAMP program seems to be working in terms of redefaults. Moody's had forecast a 25% HAMP redefault rate over three years. "That may be pessimistic based on the early data," he said.
Zandi added he is optimistic that HAMP will reach more at-risk homeowners due to program changes being implemented over the next four months. The changes will provide servicers and investors greater incentives to complete modifications and undertake voluntary principal reductions. With the improvements, HAMP servicers could complete 1.1 million permanent modifications, up from 600,000 in a prior estimate.
Treasury officials attribute HAMP's low redefault rate to the substantial reduction in the borrower's monthly mortgage payments, despite the fact the borrower's total debt-to-income ratio is almost 64% when second liens, credit card debt and other obligations are factored in. "Although it is still early, we are seeing signs that the more affordable mortgage payments under HAMP are more sustainable for homeowners and their families," Allison said.
The median reduction in monthly mortgage payments is $510 under HAMP. In the rush to launch the program last summer, many servicers allowed borrowers to enter three-month trials based on their stated income. When it came time to convert them to permanent mods, their income had changed or they could not produce documents to verify it.
Over the past few months, government officials have directed servicers to cut off borrowers that have been in trials for more than six months but still can't qualify for a permanent modification. So far, 520,800 borrowers in the payment trials have fallen short, their trials cancelled.
Treasury officials cite the lack of documentation or missed payments as the major reasons for the heavy number of cancellations. In addition, a substantial number of borrowers were disqualified because they already had mortgage payments below the 31% DTI ratio.
Despite the cancellations, HAMP figures show that approximately 45% of the homeowners received alternative modifications from their servicers and fewer than 2% in canceled trials lose their home through foreclosure.
Meanwhile, new requirements mandate that servicers verify a trial candidate's income upfront. This change has slowed the start of new HAMP trials. Nevertheless, 38,700 consumers signed up for the trials in June, compared to 30,100 applicants in May.
"We should see a much higher conversion rate to permanent modifications as homeowners enter verified trial plans," said Allison.
Conversions peaked in April when HAMP servicers completed 68,300 permanent modifications. At the time, government officials were stressing the need to speed up the conversion process. Since then, trial-to-perm modification conversions have slowed. HAMP servicers completed 51,200 permanent modifications in June, up 7% from May.
The permanent modification numbers are "simply too low" compared to foreclosure filings, according to National Community Reinvestment Coalition president and chief executive John Taylor.
"Numerous problems plague the program, the most important of which is that it does not require mandatory principal reductions. Even after implementation of new guidelines in October, principal reduction will continue to be voluntary," Taylor said.
Moody's economists estimate 15 million homeowners are underwater and more borrowers are expected to walk away and default on their loans. A fourth wave of strategic defaults is "just kicking in," Zandi said.
