Stee-Rike Two for the HAMP
For the first time during the past 36 months, Lender Processing Services (LPS) reported this month that the percentage of non-current mortgages (either delinquent or in foreclosure) declined during February to 13.48% from 13.61% in January. While this is the second highest reading in the history of the LPS survey, it does suggest that the U.S. residential housing market has reached a bottom, as least temporarily. The surge in recasting of option-ARMs during 2010 and 2011 may make this improvement short-lived, but, at least for now, this is the best news that the residential housing market has had in three years. Even so, there remain 1.8 million properties in foreclosure and another 5.6 million properties that are delinquent. Moreover, there are more than 11 million properties that, according to First American CoreLogic, are worth less than their outstanding mortgage balances, and underwater homeowners are increasingly likely to default.
With this background, the Obama administration announced yesterday that it was dipping into the $50 billion kitty for its foreclosure mitigation program know as Home Affordable Modification Program (“HAMP”) for $14 billion. This portion of the kitty, which was taken from the $787 billion Troubled Asset Relief Program (“TARP”), is to be used incentivice lenders to modify delinquent mortgages not only by reducing interest rates and extending maturies, but also by reducing outstanding principal balances. Research has shown that reduction of principal is the most effective component of successful mortgage modifications, although redefaults within 12 months of modifications remain above 50% for all modifications. Of the permanent modifications done under HAMP, only about one in four have included principal reduction. The newly announced changes to the HAMP also would allow unemployed borrowers to skip from three up to six months of mortgage payments.
Related changes were announced to the FHA program, which would allow borrowers to refinance into FHA-guaranteed mortgages. Borrowers whose first-lien holders wrote their primary mortgage down to no more than 100% of appraised value and whose combined first and second liens total less than 115% of appraised value would qualify. These borrowers also would have to have a minimum FICO credit score of 500.This revamp was a tacit admission by the administration that the HAMP, which was supposed to save 3–4 million homeowners from foreclosure by 2012, has been as dismal a failure, just as critics have claimed. The most recent data from the HAMP show that, during its first 12 months, it has led to trial mortgage modifications for 1.35 million borrowers, but permanent mortgage modifications for only 169,000 borrowers, or about one in eight. The press release now claims that HAMP's ultimate goal is to "offer modifications" rather than actually "complete modifications." This is a fitting goal for an age where every child gets a trophy for competing, regardless of outcome. What is important is that you tried, not that you succeeded.
Most of the temporary modifications are not expected to qualify for permanent modifications. The primary reason offered by housing counselors is the inability of borrowers to complete and provide required paperwork documenting income and assets. In a strange twist of fate, underwriting standards have significantly tightened during the past year as bank examiners responded to the crisis by pressuring bankers and classifying loans that previously would have passed without mention. Participants in the trial modification program have only three months to complete this paperwork during which they also must remain current on their modified payment. Many are able to make the modified payments but are unable to meet the documentation requirements.
In addition, the Office of the Comptroller of the Currency (“OCC”) and the Office of Thrift Supervision (“OTS”) released this week a report documenting that more than two out of three permanent mortgage modifications done during 2008 and 2009 were 30 days or more past due within twelve months of modification. If this holds true, then only about 40,000 of the 120,000 permanent modifications done thus far will actually save the homeowner from foreclosure. While more than half of the permanent modifications have taken place during the past three months, the likelihood of ramping this program up to the point where it reaches its goal of saving 3–4 million are so remote that Neil Barofsky, special inspector general for the TARP, warned this week that the HAMP might only serve to spread the foreclosure crisis over several years.One of the primary concerns about incorporating principal reduction into foreclosure mitigation efforts is the moral hazard it creates for the 11 million homeowners who owe more than the value of their properties. By creating a program that rewards borrowers for bad decisions to take on more debt than they could service, critics fear that underwater borrowers will strategically default in order to take advantage of the program, even when they have the means to continue making payments on their upside-down mortgages. This could prove especially costly as an estimated one-half million Option-ARMs recast during 2010 – 2011.
