Only 15,000 New HAMP Trials Started in June

HAMP is continuing to lose steam as fewer homeowners are applying for modifications.

From The Treasury: Servicer Performance Report Through June 2010

More Than 50,000 New Permanent Modifications in June

• Total number of permanent modifications increases nearly 15%, with growth in permanent modifications averaging more than 50,000 per month over the last six months.
• Homeowners in permanent modifications are experiencing a median payment reduction of 36%, more than $500 per month.
• Homeowners in permanent modifications are guaranteed lower payments for five years, then fixed terms at today’s low rates for the life of the loan.

Servicers Continue to Work Through Aged Trial Population

• Cancellations continue to rise as servicers comply with Treasury guidance to make decisions on aged trials. Of the newly canceled trials this month, more than 60% had been in trial six months or longer.
• Servicers are still completing their reviews of nearly 166,000 active trials lasting six months or more.
• Approximately 45% of homeowners in canceled trials entered an alternative modification, based on survey data from the eight largest HAMP participants. Fewer than 2% of homeowners in canceled trials went to foreclosure sale.
• The most common causes of cancellations include incomplete documentation, missed trial payments, or mortgage payments already less than 31% of the homeowner’s income.

There are now about 364,000 active trials, down from 467,000 last month. Cancellations have jumped from 521,000 from 430,000 last month. For the last couple of months, HAMP has been expelling more homeowners than it absorbs.

The pace of new trial modifications has come to a near-halt, with just 15,000 new trials started in June.

This is a sign that either applicants are being screened more carefully, or that there are simply fewer homeowners applying.

Some Good News

Some good news from this report is that an additional 53,000 homeowners received permanent modifications. Of these, 100% received some sort of interest rate reduction, 56% received a term extension, and 29% received principal forbearance.

Debt Ratios

Back-end debt ratios continue to climb for borrowers. The median back-end debt-t0-income ratio for permanent mods began at an astounding 79.9% and was modified to 63.7%.

Calculated risk adds “And that is the median – and just imagine the characteristics of the borrowers who can’t be converted!”

Additional Perspective

Felix Salmon points out that of nearly half of the canceled modifications are getting “alternate modifications” from the servicers themselves.

The first thing to note is that the enormous number of failed trials — to put the number in context, there were only 299,092 permanent modifications started through April — is not a sign of good news, where the borrowers have exited the trial by paying off their mortgage. That only happened 1.1% of the time.

Instead, depressingly, by far the most common reason for abandoning the HAMP trial is “Alternative Modification” (48.9%). Cue desperate Treasury spinning, in a press release entitled “Impact of Administration Efforts Seen in Signs Of House Price Stabilization and Increased Affordability”:

Nearly half of homeowners unable to enter a HAMP permanent modification enter an alternative modification with their servicer, and fewer than 10 percent of cancelled trials move to foreclosure sale.

Remember that in these cases the HAMP modification is not only subsidized by the government: it was also entered into, after enormous amounts of paperwork, by both the borrower and the servicer. It’s hardly credible that after going through that laborious process, both of them would happily tear up the agreed-upon modification and enter into something more mutually beneficial instead.

Rather, I see here evidence that the HAMP modifications are so weak and so unhelpful that there’s far too little incentive for borrowers and lenders to stay in them. And of course we know why that would be: such modifications almost never make a significant dent in the principal amount outstanding, and as a result homeowners who are underwater on their mortgage simply remain underwater on their mortgage, with the concomitant enormous probability of redefault.

This is disappointing on two levels. First, it suggests that perhaps servicers aren’t trying all that hard to make HAMP mods work, probably because HAMP dictates some protections and standards for the borrower. Second, the “alternate modifications” are likely more short-term and probably favor the bank much more than the borrower.

It stands to reason that redefault rates for these alternate modifications will be significantly higher than for HAMP mods.