Home Affordable's weak start

By Alan White

            Two important reports on the foreclosure crisis and the Administration’s plan to end it were released on Friday.  So far the Home Affordable modification program (HAMP) is looking like an expensive failure.  Most disturbing is the conversion rate of temporary modifications to permanent ones, which is less than 4% for temporary mods initiated last April and May.  Servicer performance remains wildly inconsistent, and hundreds of thousands of homeowners who want to save their homes are slipping through the cracks.  The good news, I suppose, is that HAMP stimulated servicers to find half a million homeowners who appear to be suited for modifications rather than foreclosures.

            Treasury’s report of September data continues the approach of jealously guarding information about HAMP that does not cast it in a positive light.  The October monthly data report consists mostly of useless fluff, i.e. a bar graph showing the cumulative number of trial modifications, rather than simply reporting month-by-month totals, as HOPE NOW did.  The monthly totals of temporary modifications for July, August and September are around 100,000 to 120,000, basically the same number as the permanent modifications the industry was doing voluntarily before HAMP.  In fairness, servicers also closed 50,000 to 70,000 permanent modifications during those months, without HAMP subsidies.

            Treasury chose not to reveal the number of permanent modifications in September, which are appallingly low.  That information appears in the Congressional Oversight Panel’s report on HAMP.  After six months and 487,000 trial modifications, HAMP has resulted in fewer than 1,800 permanent modifications.  Nearly half of the permanent mods were done by a single servicer, Ocwen.  Even if we consider only the 50,130 temporary mods reported for the first two months of HAMP (April and May), the conversion rate is shockingly low.  The policy wonks who came up with the trial modification plan assumed that after culling out the homeowners who failed to make three payments, the rest of the trial mods would seamlessly convert to permanent mods in month four, given that three months should be sufficient to get the necessary paperwork in place.  It seems highly doubtful that 96% of homeowners with April and May trial mods were not able to make three payments.  The problem, therefore, must lie in servicers obtaining and completing the income verification and written agreement necessary to conclude a permanent mod. 

            There also seems to be a failure to communicate at the initial stage of the temporary modification process.  Servicers have made 758,000 trial mod offers since HAMP began, but only 487,000 trial mods were even started.  Treasury does not describe precisely the causes of this low take-up rate.  Given the median payment reduction of $570 a month, it is hard to understand why any borrower would refuse a trial modification.  Trial mods ordinarily would not be offered unless there has been communication of some sort with the borrower, because at a minimum the servicer needs to know the borrower’s current income under the HAMP guidelines.  It is possible some servicers made offers based on information they had obtained in the recent past, and then were unable to contact homeowners.  It is also possible that homeowners rejected some below-average modification offers as insufficient to resolve their payment problem, opted for bankruptcy, could not or did not make the first payment, chose a sale of the house, or walking away instead.  Nevertheless, Treasury should be concerned to find out the reasons for the disappearance of 271,000 homeowners who superficially seemed interested in saving their homes.  (HAMP trial mods are only offered to owner-occupants, not to investors, although some servicers will make unsubsidized workout agreements with investors.)

            Taken together, the low take-up rate and the extremely low conversion from temporary to permanent agreements points to massive systems failures among the servicers.  This seems especially clear given the wide variations in servicer performance, i.e. some servicers seem to be able to beat the industry average by a long shot.  Treasury has not given information on which servicers were responsible for the 1800 permanent modifications, but all indications are that only a few servicers have contributed to even that sadly small number.  Treasury and the servicing industry need to turn their attention to this huge failure to communicate, and figure out how to simplify the jobs of homeowners, housing counselors and customer service representatives to achieve better results.

            The 64% average take-up rate for modifications conceals a huge variation among servicers, i.e. banks and mortgage companies.  Citimortgage had a 77% take-up rate, while American Home Mortgage Servicing (servicer for former Option One loans, among others) reported only a 6.5% take-up rate.  In general the subprime servicers had lower take-up rates than the large banks.  This could be because their borrowers are more financially stressed, or possibly because they had been more aggressive in offering modifications to their best prospects before HAMP, and so have fewer good prospects to work with.  On the other hand, Saxon, a subprime servicer, had an 83% take-up rate.  Perhaps Treasury should start firing the underperforming servicers and bidding their work out to the successful companies.  After all, trillions of dollars of mortgage-backed securities are owned by the Treasury, Fannie and Freddie, and the Federal Reserve, in other words, us.

Comments

[mountain homes for sale in virginia]

I've seen the treasury’s report of September data, and I think it's not that good.

-Sam

[InkMiser]

Have you ever tried to get a HAMP application approved? The servicers' Loss Mit departments are woefully understaffed and undertrained. I have have had clients wait six months to get their applications reviewed, only to be told that their information was stale and they had to reapply. I have not dealt with people trying to get converted to a permanent mod program, but I would guess that the same types of delay are taking place.