Loan-modification failure of the day

By Felix Salmon
July 21, 2010
monthly report on how the program is doing, and you'll see a page detailing what they call the "disposition path" of the 194,056 trial mortgages which have been cancelled through April. Here's the chart:

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As of today, Treasury has started releasing a new set of datapoints with respect to its Making Home Affordable program. Look at page 5 of the monthly report on how the program is doing, and you’ll see a page detailing what they call the “disposition path” of the 194,056 trial mortgages which have been cancelled through April. Here’s the chart:

disposition.tiff

The first thing to note is that the enormous number of failed trials — to put the number in context, there were only 299,092 permanent modifications started through April — is not a sign of good news, where the borrowers have exited the trial by paying off their mortgage. That only happened 1.1% of the time.

Instead, depressingly, by far the most common reason for abandoning the HAMP trial is “Alternative Modification” (48.9%). Cue desperate Treasury spinning, in a press release entitled “Impact of Administration Efforts Seen in Signs Of House Price Stabilization and Increased Affordability”:

Nearly half of homeowners unable to enter a HAMP permanent modification enter an alternative modification with their servicer, and fewer than 10 percent of cancelled trials move to foreclosure sale.

Remember that in these cases the HAMP modification is not only subsidized by the government: it was also entered into, after enormous amounts of paperwork, by both the borrower and the servicer. It’s hardly credible that after going through that laborious process, both of them would happily tear up the agreed-upon modification and enter into something more mutually beneficial instead.

Rather, I see here evidence that the HAMP modifications are so weak and so unhelpful that there’s far too little incentive for borrowers and lenders to stay in them. And of course we know why that would be: such modifications almost never make a significant dent in the principal amount outstanding, and as a result homeowners who are underwater on their mortgage simply remain underwater on their mortgage, with the concomitant enormous probability of redefault.

As Ryan Avent put it on Monday, in the wake of atrocious numbers from the National Association of Home Builders,

A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery. America has neither. And so the outlook for housing will be a bleak one for the foreseeable future.

Does Treasury grok this? There’s no indication that it does.

8 comments

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From everything I’ve been hearing, the incentive to lenders/note holders/servicers far outweighs the incentive to borrowers. I am aware of several individuals who have been in the loan mod “process” with their servicer for upwards of two years now. And more than a few in the process for over a year by way of NACA’s program as well. We’re talking YEARS here. Not months…

A quick stab at a calculator tells me that 299,092 permanent modifications translates into $1,345,914,000.00 in “incentives” have been paid as a result of these permanent mods. Not a bad incentive.

On a separate note, I wish that I had paid more attention to the Cammy Baker loan mod story out of Windham, OH that you covered back in May. If I’m looking at the correct files, the foreclosure never should have been allowed to go forward – never mind force the Bakers into a loan mod.

Posted by Mike_Dillon | Report as abusive

HAMP is a huge flop and waste of taxpayer money. It’s astounding the Michael Barr, who has been instrumental in HAMP, is being considered for being named head of the Consumer FInancial Protection Bureau.

Posted by TimmyGeithner | Report as abusive

Maybe this is a dumb idea, I dunno, but couldn’t the banks put mortgages ‘on hold’, whereby they would take possession of a home but rent it out really cheap (ie, enough to cover their expenses + a little for their trouble) to the owners until either: a) the market improves enough to make these mortgages NOT so underwater; b) a suitable short sale buyer is found; c) the owner is able to comfortably make payemtns again. There could be a time limit depending on the amount of equity in the home – eg more equity, more time – capped at five years? And mortgages that are/were deemed predatory will be traced to their orignators, and THEY will be made liable to security holders and banks alike. Maybe the last bit goes too far (or perhaps some other measure can be taken against them) but I think that the orignators have gotten a free pass here when they are as much to blame as anyone. Thoughts?

Posted by CDNrebel | Report as abusive

The link above is to an older report. The latest report, with June data, is http://financialstability.gov/docs/June% 20MHA%20Public%20FINAL%20072010.pdf.

BarCap disses some of the misleading info in this report at http://ftalphaville.ft.com/blog/2010/07/ 21/293876/barcap-vs-hud-on-hamp/.

Posted by JimFickett | Report as abusive

I wouldn’t necessarily interpret these as people voluntarily turning down HAMP and opting for an alternate modification. Prior to the requirement to verify income upfront, many trials were started on stated income. Many of those trials were then cancelled due to borrowers not submitting their documentation. So, this table shows the current status of all people whose trials have been cancelled, not necessarily at their request.

Additionally, you suggest that borrowers are gravitating to alternate mods because HAMP mods don’t contain any principal forgiveness and thus there is no incentive to stay in. There is no prohibition against principal forgiveness in HAMP. So, if servicers were planning to offer it in an alternate mod, they would almost certainly prefer to do so within a HAMP mod so they could receive incentives.

Ryan Avent’s quote suggests there needs to be a solution to negative equity. Well, Treasury has added a subsidized principal reduction component to HAMP to answer this criticism.

@Mike_Dillon – Servicer incentives are $1000 per permanent modification. Investors receive a cost share payment that is variable, but hard to view it as income as they receive a partial subsidy on the decreased payments they are receiving as a result of the mod. Borrower incentives are $5000 ($1000 per year for 5 years).

Posted by DaDaDan | Report as abusive

@JimFickett – I just posted a comment over at Alphaville that I’m pretty sure BarCap is wrong. They claim that Treasury is removing defaults from the delinquency stats, but that assumption makes no sense as it would render the meaning of the “90+ delinquent” column meaningless. Additionally, the introduction to the report on page 1 seems to refer to these loans as defaults.

And, in general, if people have questions about the numbers in the report, I would suggest calling the Treasury Department and asking before publicly calling them liars.

Posted by DaDaDan | Report as abusive

Oh I’m sure Treasury copies that, Houston. Quite a few ruffled feathers by the look of the thread.

The old adage about statistics was always wrong: there are lies, damned lies, and syntax.

http://nbyslog.blogspot.com/2010/07/opin ion-moral-hazards-for-unethical.html

Posted by nbywardslog | Report as abusive

Grok it? They like it. Aristotle: You are what you repeatedly do. So with policy.

Posted by lambertstrether | Report as abusive