Wednesday, December 09, 2009

Mortgage modifications -- the devil is in the details 

I'm fascinated and horrified by this story:

Hamp (Home Affordable Modification Program) is aimed at reducing interest payments and delaying principal payments for eligible homeowners. To do this they have to apply and then agree to enter a three-month trial period, in which they need to make the lower payments and submit some additional documentation (stuff like proof of income). If that�s done successfully, the homeowner is granted a permanent mortgage modification - with lower monthly interest payments and longer principal forbearance.

Only, a major problem of the programme is the number of permanent mods (or lack thereof) being completed.

To give you an idea of the problems the programme is facing, below is nice chart from the Tuesday testimony of Molly Sheehan, senior vice president at JP Morgan Chase Finance...

...for every 100 Hamp trial plans initiated through April to September 2009, only about 20 borrowers managed to complete all the required documentation and were eligible for the modification. Of those 20, according to Sheehan, 15 will probably get a Hamp mod with a payment reduction.

Actual numbers, as you can see from the table, are even lower. Out of 199,033 mods offered in the period, just 4,302 have become permanent and completed.

The figures are similar over at Bank of America, the country�s biggest mortgage servicer (CHK). In his testimony, Bank of America Home Loans credit loss mitigation strategies exec Jack Schakett said that of 65,000 homeowners who have made the three trial payments, 50,000 have not submitted the right documentation. Those 65,000 trial mods are due to end on December 31.

The government is of course pushing hard to get more permanent modifications, but with 29% of JPM mortgagees not making the payments and another 51% either not having the right documentation, a job, or being underwater on their homes, it's hard to see how this is going to work. So the government is now contemplating not just having principal payment delayed but forgiven. Said one expert, the government program is "destined to fail." Said another,
�The phenomenon of underwater mortgages is one of the most troubling aspects of the entire housing market collapse,� Julia Gordon, senior policy counsel at the Center for Responsible Lending, told the committee. �Homeowner equity position has emerged as a key predictor of loan modification re-default, more so than unemployment or other facts.�
Calculated Risk reports JPM's private programs (through Chase) have had better success, but Congress is moving from jawboning to threatening a mortgage cramdown, but the latter might be coming. Before bashing that, I want to see how it handles second- and third-lien holders. It could make a much bigger mess, and cause more bank failures in 2010.