New data on the Home Affordable Modification Program (HAMP) show that loan modification activity is continuing along recent trends, with increasing permanent modifications and decreasing trial modifications and total HAMP activity (see our previous analyses). Permanent loan modifications rose by 15 percent from May to June, while trial modifications decreased by 23 percent and total active modifications fell by 7 percent (see charts A and B below). These changes are less dramatic than May’s increase in permanent modifications (17 percent), decrease in trial modifications (27 percent), and decrease in total modification activity (13 percent).
Nationally, total HAMP activity also fell by 7 percent from May to June. Permanent modifications rose by 14 percent while trial modifications fell by 22 percent.
As we noted in past months, the falling numbers of active modifications are likely due in part to the fact that many servicers did not require full income documentation before starting a trial modification; borrowers who do not qualify based on income are now being dropped from the program. Additionally, Treasury now requires that all servicers collect full income documentation before starting a trial modification, likely slowing the rate of new trial modifications.
Compared to the 10 metropolitan areas with the highest HAMP activity, Chicago is fourth in terms of percentage of all active HAMP modifications that are permanent, with permanent modifications comprising 52.4 percent of all active modifications. This is higher than the national average of 51.7 percent of all active modifications being permanent (see charts C and D below).
However, within the context of continually decreasing numbers of active modifications, this ratio does not indicate how well metropolitan regions are performing in terms of converting trial to permanent modifications. For instance, more than 13,000 modifications in the Chicago region have been cancelled since the February peak of 51,301 active modifications. The ratio of permanent to all active trial modifications continues to increase by virtue of the decreasing number of all active modifications. Since Treasury does not currently release regional data on all modifications that have been started (including those that have been cancelled), we cannot accurately assess the Chicago region’s conversion rate.
While permanent modifications continue to rise in the Chicago region and across the nation, recent reports call into question the long-term sustainability of HAMP modifications in the absence of widespread principal forgiveness. Underwater homeowners, who have loans worth more than their property, are much more likely to re-default. The GAO reported that borrowers with loan-to-value ratios of more than 150 percent, which means that they owe 50 percent more than their home is worth, are more than seven times as likely to go into foreclosure as borrowers with some equity in their homes. The report also notes that, troublingly, the average HAMP borrower has a loan-to-value ratio of 150 percent. This raises concerns about the likelihood of high rates of re-default in HAMP if changes are not made to the program that address the problem of underwater loans.
Treasury recently introduced the voluntary Principal Reduction Alternative (PRA) program to incentivize servicers to reduce principal for underwater homeowners. Servicers who choose to participate in PRA calculate the projected cash flow if a borrower’s principal is reduced to 115 percent of home value and compare it to the projected cash flow if the borrower is not offered a principal reduction. However, unlike standard HAMP procedures for loan modifications, the servicer is not required to offer the principal reduction if it turns out that it would bring in more money than if the borrower is not offered a principal reduction—they are simply required to consider it. The quarterly report to Congress of the Special Inspector General for TARP strongly recommends that Treasury make principal reduction mandatory within PRA in order to lessen the possibility of high rates of re-default, which some analysts project to be 65-75 percent under current HAMP guidelines. The report concludes, “At its core, PRA represents an opportunity to address a significant danger for HAMP—that modifications will fail and borrowers re-default because the borrowers are simply too deeply underwater, thereby wasting taxpayers’ money with little actual benefit.” However, Treasury has rejected this recommendation.