HAMP Cuts Re-default Rate

Homeowners who modified their mortgages under government’s Home Affordable Modification Program (HAMP) are staying current on their loans at a far better rate than critics expected and are outperforming industry modifications, according to the largest data from the Treasury Department.

December data for the program confirms earlier data (see Mortgage Modifications are Sticking) and shows that after 12 months, only 15 percent are re-defaulting and nearly 85 percent of homeowners remain in a permanent modification. “At 12 months, nearly 85 percent of homeowners remain in permanent modifications with less than 16 percent of homeowners missing three consecutive payments,” Treasury says.

HAMP appears to be outperforming both private sector modifications and earlier government programs. Few lenders release their re-default rates, but according to CNBC, rates for re-default on modifications are about 35 percent for JP Morgan Chase. A recent Comptroller of the Currency/Office of Thrift Supervision report found that the re-default rate at 60 days or more past due on all private sector mods completed in the fourth quarter of 2009 is 27.7 percent after nine months. According to the OCC/OTS, the re-default rate on all loans modified in the first quarter of 2008 was more than 50 percent one year later.

Homeowners in HAMP permanent modifications have already reduced their mortgage obligation by more than $4.5 billion to date. Homeowners in active permanent modifications have seen their monthly mortgage payment cut by a median of approximately 40 percent. Eighteen percent of homeowners in active permanent modifications have reduced their monthly mortgage payment by more than $1,000 each month.

HAMP has several advantages over proprietary modifications. HAMP has a three month trial period (which was extended to six months for the first wave of mods in 2009) that provides an additional period of seasoning and screens out the weakest borrowers. Also HAMP’s trial period, which weeded out 146,031 borrowers, should result in stronger candidates for permanent modification. Moreover, the HAMP modifications remain in effect only for five years. Unless they refinance, homeowners will return to their original monthly payments.

By the end of last year, roughly 579,000 borrowers had received a permanent HAMP modification, with 58,000 having dropped out of the program due to defaults and other reasons, the Treasury Department said. When the program was launched in 2009, the Administration set a goal of preventing foreclosure for 3 to 4 million homeowners.

HAMP has received widespread criticism for falling far short of its goals and failing to make a greater impact on the foreclosure crisis. In Congressional hearings yesterday, it was widely castigated. Three Republican members of Congress introduced legislation this week to terminate the program.

However, the re-default numbers are an important test for the program, which has had problems getting its re-default numbers right.

Within six months of the launch of the Bush era Hope for Homeowners program, at a time when the economy was in much better shape, over half of all the loans it had modified loans 30 days or more delinquent and over a third were 60 days or more delinquent.

In July, Treasury created a stir when it released figures in its August Housing Scorecard claiming that fewer than 2 percent of HAMP modified loans at six months old were 90 or more days delinquent, and that fewer than 3 percent of homeowners in permanent modifications at nine months have defaulted on their HAMP-modified loans.

When the Treasury number was issued, Fitch Ratings had just predicted that most borrowers who have had their mortgages modified through a government-sponsored program will re-default within 12 months. Between 65 percent and 75 percent of loans that are modified through the Home Affordable Modification Program but not backed by the federal government are likely to go bad, Fitch said.

“Many of these borrowers still have very heavy levels of other debt,” said Diane Pendley, a Fitch managing director at the time. “Auto loans, credit cards and other expenses. The HAMP modifications reduce housing expenses down to 31 percent of income but do not touch these other obligations.”

Teasury subsequently backtracked when challenged and issued new numbers, raising the rate of re-defaults of HAMP permanent modifications in place six months that are 60 days delinquent or more to about 10 percent. The default rate for over 90 days delinquent is about 6 percent.