Time to sober up! The headlines blare the possible triumph of the Home Affordable Modification Program yesterday claiming the redault rate is much lower than anybody projected. According to the US Treaury’s housing scorecard, the re-default rate (90 or more days past due) for homeowners for at least six months is just 1.7%. Wow! This news will make HAMP the greatest loan modification program in history!
Under the program, homeowners who qualify can have their mortgage payments cut to 31% of their monthly income by extending their loan term to 40 years or slashing their interest rate to as low as 2% for five years. Participants must make three monthly payments during a trial period before they receive a permanent modification.
As much as we all wish this news to be true, as it would surely lead us back to housing stability as we quickly modify home loans and fix the housing crisis…it just is not accurate. We return to the central point of many of my posts. Numbers can be presented in many ways and statistics can be used to make many different, and often conflicting points.
In what I will propose is a lack of research in our media or understanding of this economic situation, combined with just the right words utilized through the Treasury Department, renewed optimism now exists that loan modifications may be a very successful part of our economic recovery. Oh, I hate being the person to throw cold water on this whole idea but here goes.
- According to research from Barclays Capital, in a July 21 intra-day commentary on residential credit, Barclays analysts Sandeep Bordia and Jasraj Vaidya write that while they believe overall redefaults from HAMP will be better than those from prior modifications, “we find that the data as reported…are misleading and fail to capture the full magnitude of redefaults from these modifications.” The federal report showed that almost 6% of permanent modifications were 60+ days delinquent at the six-month mark, while fewer than 2% of permanent modifications were 90+ days delinquent. A caveat, as pointed out by Bordia and Vaidya, can be located in a footnote in the report, which states, “a HAMP permanent modification is canceled for nonpayment if it is more than 90 days delinquent.” The analysts interpret the footnote to mean that 90+ day delinquent loans are removed from the percentage of delinquent numbers reported. “Removing 90+ [day delinquent] permanent mods from the delinquency calculation and basing the calculation only on successful modifications makes the redefault rates look too low,” Bordia and Vaidya write. The analysts additionally say that their base case expectation of approximately a 60% lifetime redefault rate on HAMP modifications is still adequate.
- The number of homeowners leaving the program exceeded those who received new loan modifications for the second straight month. More than 91,000 homeowners cancelled their government loan modifications in June, while just 38,728 received new modifications, according to data released Tuesday.
- Almost 530,000 of the nearly 1.3 million government modifications have been cancelled since the program began last March. Dropouts climbed as homeowners missed payments on their modified loans or failed to turn in required paperwork.
I for one look forward to the day we see stabilization in housing. The debate continues as to what is the best way to accomplish stability. Nothing is going to stop the train that is long ago out of the station that is pursuing every possible action to keep homeowners in their homes. It serves the government to send out this type of news to work on the optimism factor that is very much in a deficit today.As I look across my own neighborhood, not knowing what the circumstances some of my neighbors carry, but seeing their inability to maintain their homes to community standards, I am again reminded that just because a method is offered to reduce a mortgage payment, the likelihood that suddenly a homeowner can pay for replacing windows, maintaining landscaping, and trimming overgrown tree branches hanging over their homes, is only solved through an orderly sale and relief of their debt through liquidation, or prosperity. The prosperity thing seems to not be a likely option as most states are now seeing an actual increase in unemployment rates and many people have left the job market entirely.
What do modifications really provide in the big picture and why do so many press organizations trumpet success when there are hard questions that really need to be asked about those results?
