Data show that aggressive modifications have brighter futures, while Chicago trial mods see nascent growth: December HAMP Analysis

The Home Affordable Modification Program has modestly improved the level of modification activity in Chicago this month, though its pace continues to be far slower than what’s necessary to address the foreclosure crisis (see our previous analyses). There were 35,012 active modifications in the region in December 2010, up 3.57 percent from last month’s 33,806.

Permanent modifications are continuing to grow slowly, and the increase in trial modifications marks first time trial modifications have grown in the region in eight months. Chicago region permanent loan modifications rose by 3.58 percent from November to December, compared to 3.12 percent growth from September to October and 4.73 percent growth from October to November (see charts A and B). Regional trial modifications grew by 3.52 percent from November to December, following a 7.41 percent decrease from September to October and a 4.66 percent decrease from October to November.

 

 

 

Chicago region trends continue to mirror national patterns. Nationally, trial modifications dropped by 2.83 percent from November to December and permanent modifications grew by 3.37 percent. Nationally, total modification activity grew by 3.24 percent from November to December. Permanent modifications made up 77.5 percent of the Chicago region’s total active modifications, while permanent modifications make up 77.4 percent of total active modifications nationally.

Treasury released two new charts in this report that detail the performance of HAMP modifications by the age of the modification as well as the size of the reduction in the borrower’s monthly payment (click for larger charts).

(Source: US Department of the Treasury)

These data clearly show that deeper modifications that make substantial cuts in borrowers’ monthly payments have a better chance of being sustained over the long run. After one year, permanent modifications that reduce borrowers’ payments by more than 30 percent are half as likely to be three months behind on their payments as are modifications that reduce borrowers’ payments by 20 percent or less. During that time period, 12 percent of modifications that reduce payments by more than 30 percent were three months delinquent after one year, compared to 26 percent of modifications that reduced payments by less than 20 percent. Overall, 15.8 percent of HAMP modifications were three months delinquent after one year.

Fortunately, a majority of HAMP modifications make deep cuts to monthly payments: the median decrease cuts monthly payments by 36 percent. Many millions of borrowers are being placed into private non-HAMP modifications, however, with no guarantee that their monthly payments will be reduced enough to have a long-term impact. Data from regulators indicate that private modifications are twice as likely to default as are HAMP modifications. Servicers must make far-reaching and aggressive modifications in order to make a real impact on the foreclosure crisis.

A recent report from the TARP watchdog, the Special Inspector General for the Troubled Assets Relief Program (SIGTARP), pulls no punches in describing Treasury’s failure to hold servicers accountable to HAMP’s requirements. HAMP “continues to fall dramatically short of any meaningful standard of success”; Treasury has “yet to impose a financial penalty on…a single servicer for any reason other than failure to provide data.” Treasury officials have expressed concerns that servicers would leave the program if they strictly enforced its provisions, to which SIGTARP replies, “Treasury needs to ask itself what value there is in a program under which not only participation, but also compliance with the rules, is voluntary…If getting tough means risking servicer flight, so be it; the results could hardly be much worse.” We agree that Treasury should enforce penalties upon servicers who needlessly deny borrowers due to lost paperwork, poor communication, incorrect eligibility evaluation, and the many legions of complaints that have been reported about servicers’ role in HAMP. HAMP has potential to help a substantial number of troubled borrowers avoid foreclosure, but not if bad behavior on the part of its implementers is condoned.