Professor Cole's Finance Blog: March 4, 2010: Grading the HAMP One Year Later

On March 4, 2009, the U.S. Treasury Department announced the Obama administration’s Making Home Affordable program, which included a “comprehensive $75 billion Home Affordable Modification Program now known simply as “HAMP.” HAMP was supposed to help 3 to 4 million at-risk homeowners avoid foreclosure by permanently modifying their mortgages in such a way as to reduce their monthly mortgage payment to a “sustainable amount.”

As the program reaches its one year anniversary, we must ask about how responsibly the Administration is spending $75 billion of our taxpayer dollars. Treasury released the most recent numbers on Feb. 16, which covers the program results through January 2010. According to this report, about 1.3 million borrowers have been extended an offer for a trial modification, 1.0 million borrowers have started a trial modification, of which 830 thousand are still active, 60 thousand have been canceled, and 117 thousand permanent modifications were started.

So, after 11 months, the program has “reached” more than a million of the targeted 3 to 4 million at-risk homeowners, but has produced permanent loan modifications for only a hundred thousand. That said, the January results were a vast improvement over November and December 2009, when only 31 thousand and 66 thousand permanent modifications had been started, respectively. So it appears that the program is beginning to hit its stride, but it will need to continue this progress if it is to make a real dent in the problem because the problem continues to grow.

On Feb. 19, 2010, the Mortgage Bankers Association released results from its National Delinquency Survey for the fourth quarter of 2009. This report showed that the combined percentage of loans in foreclosure or at least one payment past due reached 15.02%, the highest level on record, up from 14.41% in the third quarter of 2009. In the fourth quarter, the percentage of loans in foreclosure was 4.58% and the percentage past due was 10.44%, up from 4.47% and 9.94%, respectively, in the third quarter. This translates into an additional 335 thousand new delinquencies and an additional 60 thousand foreclosures during the fourth quarter.

On Feb. 23, 2010, First American CoreLogic released a report in which it estimated that, in the fourth quarter of 2009, 11.3 million residential properties representing 24% of all properties with mortgages were “under water,” meaning that the borrower had negative equity because the value of the property had fallen to where it was less than the outstanding mortgage balance. This was an increase of approximately 600 thousand properties from the third quarter of 2009. More than 10 percent of properties are estimated to be underwater by more than 25% of loan value. The report goes on to demonstrate a strong correlation between negative equity and foreclosure.

So we see that delinquencies are growing by 100 thousand per month, foreclosures by 20 thousand per month, and underwater mortgages by 200 thousand per month. Against this backdrop, HAMP has managed a total of only 120 thousand permanent modifications, although 50 thousand of these took place during January. In order to reach its goal of 3 million permanent modifications by 2012, HAMP will need to average 125 thousand permanent modifications per month. Good luck with that.

Unaddressed thus far is the knotty issue of re-defaults. Some researchers estimate that re-default rates on modified mortgages will exceed 50% within 12 months of modifications.

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