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Though the Administration's Home Affordable Modification Program (HAMP) is falling far short of its goal of helping three to four million homeowners, the program is succeeding at helping those who do make through the program are stay current on their payments and avoid re-default.

Mortgage Modifications are Sticking

OCC_2010-112a.pdfOCC_2010-112a.pdf

Though the Administration’s Home Affordable Modification Program (HAMP) is falling far short of its goal of helping three to four million homeowners, the program is succeeding at helping those who do make through the program are stay current on their payments and avoid re-default.

The first comprehensive review of HAMP re-defaults through the first two quarters of this year found that 10.8 percent of borrowers who graduated from the program in the fourth quarter of 2009 were delinquent 60 days or more on their mortgages. By contacts, modifications by private lenders during the same period had a 22.4 percent re-default rate, according to the second quarter Mortgage Metrics Report by Office of the Comptroller of the Currency and the Office of Thrift Supervision.

The report found that the key to HAMP’s success was reducing monthly payments to a level that borrowers could afford.

“Nearly all HAMP modifications reduced monthly payments, with 78.9 percent reducing payments by more than 20 percent. In addition to achieving lower payments, HAMP attempts to increase payment sustainability by targeting monthly housing payments at 31 percent of borrowers’ income. Performance data on other modifications show that reduced monthly payments result in lower re-default rates over time, and that the greater the decrease in payment, the lower the rate of subsequent re-default,” it found.

Re-default rates for all modified mortgages are improving by quarter, according to the report. Of all loans modified in the first quarter of 2009, 45.7 percent were 30 delinquent or more within three months. Loans modified a year later, in the first quarter of 2010, had reduced their 30-day delinquency rate to 23.5 percent.

“The better performance of more recent modifications corresponds with the ongoing emphasis on lowering monthly payments and improving payment sustainability. HAMP, as well as an increasing number of other modification programs, also attempt to increase sustainability by not only reducing payments, but also targeting monthly payments relative to the borrowers’ income and ability to repay the loan,” OCC/OTS said…

HAMP’s re-default results are a vast improvement over past federal mortgage modification efforts.

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.”

Treasury 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.

The new OCC/OTS report did not look at HAMP’s 90-day delinquencies, but concurred with the final Treasury rate of 10.8 percent for HAMP’s 60-day delinquencies after 6 months.

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