HAMP Program Success Rate Much Lower Than First Reported

If you've been following the ups and downs – mostly downs – of the federal Home Affordable Modification Program, you know that the HAMP has been one big bottleneck, with just a fraction of homeowners who apply succeeding in getting permanent modifications to their mortgages.

Then two weeks ago the federal Department of Treasury trumpeted some great news about those lucky few who did make it through the process: as of June a tiny number of them, fewer than 6 percent, were ending up seriously behind on their mortgage payments after six months, with payments 60 days late or more.

Mission accomplished? Not quite.
As Shahien Nasiripour reported in the Huffington Post last week, the numbers immediately caught the attention of experts who wondered why HAMP had a single-digit failure rate when studies had shown that 40 percent or more of all modifications ended up failing within six months.

What could possibly account for the difference? Well, it turns out that the tiny failure rate was just what it looked like -- too good to be true. Fannie Mae, which supplied the data, wasn't counting borrowers who were more than 90 days late and therefore had to be cut from the program for noncompliance. In other words, the worst failures simply didn't get counted at all.

Treasury has since revised its June HAMP report to delete the erroneous figure, promising an independent review and, eventually, accurate data. Analysts at Barclays Capital, who first called attention to the dubious numbers, project that ultimately the HAMP default rate will be somewhere between 60 percent and 65 percent

Luckily, we don't have to wait to get a more accurate snapshot of how well HAMP participants – and other borrowers who've worked out loan modifications with their lenders -- are actually doing. A recent report from federal banking regulators offers scads of data, and while it doesn't name a source, these numbers look more realistic than Treasury's. It finds that in the last three months of 2009, 7.7 percent of HAMP loans were more than 60 days late on payments after just three months, and 16.7 percent were at least 30 days late.

The report also confirms what should be common sense: Loans whose modifications reduce monthly payments have the lowest rate of failure, and the more those payments are reduced, the lower that failure rate is. Many loan modifications done before HAMP, which launched in Spring 2009, or done for borrowers who didn't qualify for HAMP, actually increased payments. Overall among the million-plus modifications in 2008 and 2009, more than half of borrowers whose payments increased were more than 60 days behind after six months, compared with fewer than one in four who saw their payments reduced by 20 percent or more.

But six months may be too little time to tell, judging from the regulators' report. At the one-year mark, 58 percent of loans modified in 2008 and 55 percent of those in early 2009 had failed.

Will HAMP shrink those dismal numbers for the 400,000 borrowers who've received permanent modifications so far? Unless the job market comes roaring back, it's doubtful.

Meantime, we desperately need the accurate numbers and to come to grips with reality. The illusion that HAMP is helping most troubled borrowers while preventing big losses among banks and investors in mortgage-backed securities is part of what's stopping Treasury from taking the kind of aggressive action it needs to – namely, reducing principal owed. (The other is fear that if some borrowers get principal reductions and others don't, mass revolt will ensue – and that's not unfounded.) If it turns out that HAMP failure rates are as high as analysts project, then banks will have less to lose and more to gain by just cutting straight to principal reduction, and avoiding unnecessary (and expensive, for the banks) foreclosures.

What are we afraid of? Success, apparently.

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