Mortgage loan modifications, like those under the Home Affordable Modification Program (HAMP), that reduce monthly payments are more likely to be sustainable in the long term than earlier modifications, according to the latest Mortgage Metrics Report from the OCC and OTS.
The report found a sharp increase in modifications that reduced the borrower’s monthly payment. From January 2008 to March 2009, the majority of modifications actually raised or kept payments the same (click here to see why). By contrast, more than 78% of the modifications done in the second quarter of 2009—when HAMP started—reduced monthly payments. Modifications that reduced payments by 20% or more increased from 29% of all modifications in the last quarter to 38.6% in this quarter. Payment reduction is critical because, as the report notes, “the data…consistently show that re-default rates were lowest, and payments most sustainable, for modifications that reduced monthly payments.” The graph below shows that the more payment is reduced, the more sustainable the loan is in the long term—by a substantial amount. The re-default rate for modified loans whose payments were increased is almost twice the re-default rate for payments reduced by 20% or more:
The Second Quarter 2009 Mortgage Metrics report offers both hope and admonition. The data continue to predict greater success for modifications that reduce monthly payments down to affordable levels, which HAMP does. But the success of HAMP relies on the ability of borrowers to stay connected to their servicers, make it through the trial modification stage, and enter into a permanent modification. Considering experiences like this one from NHS of Chicago, which said that “82% of the individuals attending [a borrower outreach event] reported they had contacted their lender previously, 48% indicated they had contacted their lender four times and 56% reported they had attempted to apply for a loan modification on their own prior to coming to the…event,” that will prove to be a significant challenge. Moreover, the improved sustainability of HAMP modifications will not be sufficient to stop the hemorrhaging of the foreclosure crisis unless HAMP is extended to a much larger segment of the market than it currently covers.