In the Chicago region, the Home Affordable Modification Program (HAMP) continues to put homeowners into permanent modifications, but the number of homeowners enrolled in the program’s trial and permanent modifications dropped substantially from March to April.
The Department of the Treasury released its tenth report card on how mortgage lenders are doing modifying loans for eligible homeowners under the government’s Making Home Affordable program (see our previous analyses).
The Chicago metro area is slightly lagging the national average in converting trial modifications to permanent status and its ranking relative to other metropolitan areas with high HAMP activity dropped since March. As of April, 31.6 percent of trial modifications have become permanent in Chicago, while 31.7 percent of trial modifications have become permanent nationally. Of the top ten metropolitan areas with the most HAMP activity, Chicago is sixth in converting trial to permanent modifications, compared to fifth last month (see charts A and B below).
While the percentage of trial modifications becoming permanent is on the rise in Chicago, the total number of active trial and permanent modifications decreased by 8.25 percent from 51,247 in March to 47,068 in April. National change in trial and permanent modifications dropped by 7.09 percent from March to April. These significant decreases follow last month’s pause in growth (see charts C and D below).
As we noted last month, a number of changes to HAMP guidelines may be contributing to the slowdown in new trial and permanent modifications. These policies include the end of a review period for trial modifications on January 31 and a new requirement that must be implemented by June for servicers to collect full income documentation before the approval of a trial modification. The rate of new trial modification starts is likely slowing as servicers screen out ineligible borrowers in advance, although HUD points out that requiring upfront documentation will improve the conversion rates of trial to permanent modifications in the future.
Another factor likely contributing to the diminishing numbers is the HAMP borrower’s average debt-to-income ratio. Treasury tracks the back-end debt-to-income ratio, which measures what percent of a borrower’s gross income must go to mortgage payments, and the front-end debt-to-income ratio, which measures what percent of a borrower’s gross income goes to payments on all debts such as taxes, insurance, consumer debt, and homeowners’ association fees. Before modification, borrowers paid on average 44.9 percent of their income to mortgage payments and a whopping 80.2 percent of their income to all debts. After modification, borrowers pay 31 percent of their income on mortgage payments and 64.3 percent of their income to all debts. While this is a considerable improvement over pre-modification payments, it still does not leave much income left to pay for living expenses such as food, education, and transportation. A high debt load may result in borrowers falling behind on their mortgage payments in order to cover other pressing expenses and, ultimately, losing their loan modification.