U.S. Treasury officials are defending the default rates of the Obama Administration’s mortgage modification campaign, known as HAMP, after a strongly critical analysis from a government watchdog called the program’s track record “alarming.”
Data shows that the majority of homeowners who receive assistance from HAMP (Home Affordable Modification Program) have “a high likelihood of long-term success” avoiding foreclosure, and that HAMP modifications outperform private industry modifications, Treasury officials said.
Treasury was responding to a report released April 24 by the Special Inspector General for TARP, or SIGTARP, which oversees implementation of bailout funds from TARP, the Troubled Asset Relief Program. TARP funds much of HAMP.
SIGTARP said it is concerned that “the number of homeowners who have re-defaulted on a HAMP permanent mortgage modification is increasing at an alarming rate.”
But Treasury officials countered with its own analysis, which they say found that HAMP modifications consistently result in lower delinquency and re-default rates than industry modifications by banks without government incentives.
Bank regulators attribute this to HAMP’s emphasis on the “affordability of monthly payments relative to a homeowner’s income, verification of a homeowner’s income and the successful completion of a trial period plan,” Treasury said in a statement.
Treasury said it has conducted research into “loan characteristics and modification terms” and has made a number of adjustments to HAMP to help avoid re-default.
A big adjustment came in the area of verifying incomes of HAMP borrowers.
When HAMP was launched in 2009, Treasury allowed homeowners to enter trial modifications before providing supporting income documentation. This was done to get assistance to homeowners quickly.
“However, after the initial demand was met, Treasury made program changes in June 2010 requiring servicers to verify income up front before a borrower could receive a HAMP trial modification,” Treasury officials said in their response to the SIGTARP report. “Since June 2010, 87 percent of homeowners who started a trial modification have received a permanent modification.”
SIGTARP reported that as of March 31, 2013, the oldest HAMP permanent modifications, from the third and fourth quarters of 2009, are re-defaulting at a rate of 46.1 percent and 39.1 percent.
HAMP permanent modifications from 2010 also had high re-default rates, ranging from 28.9 percent to 37.6 percent.
The longer a homeowner remains in HAMP, the more likely he or she is to re-default out of the program, SIGTARP said.
Treasury officials, however, contend that HAMP has had a positive impact on the mortgage industry. In 2008, less than 50 percent of mortgage modifications throughout the industry included payment reduction. Now more than 90 percent of all modifications reduce a homeowner’s monthly payment.
HAMP has shown that payment reduction is strongly correlated with permanent modification sustainability, Treasury said.
The greater the monthly payment reduction, the greater likelihood of avoiding re-defaults.
Data published by Treasury through December 2012 showed that of the HAMP modifications lasting 24 months, only 17 percent with a monthly payment reduction greater than 50 percent had been disqualified from the program due to missing three payments — compared to a disqualification rate of 43.5 percent where the payment had been cut by 20 percent or less.