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3 steps forward, 2 back for mortgage mods

The HAMP program, now a year old, struggles with the complicated business of salvaging troubled home loans.

By Karen Datko Jun 23, 2010 1:57PM

This post comes from Marilyn Lewis of MSN Money.

 

The struggle continues over how to effectively and humanely end the country's gigantic foreclosure problem.

 

The results are in from the first year of the $50 billion federal mortgage modification program, created by the Financial Stability Act of 2009.

 

The numbers aren't dazzling. The Home Affordable Modification Program has been criticized for being slow to ramp up and for helping relatively few of the country's millions of troubled mortgages.

 

The government's new report card on the program shows that "more troubled homeowners have fallen out of trial mortgage modifications than have received long-term help," CNN reports.

 

About 340,000 homeowners have received permanent loan modifications that give them five years of lower mortgage payments.

But even larger numbers were dropped: Some 436,000 homeowners -- 100,000 of them in May alone -- flunked their HAMP trial period, The Washington Post reports.

 

Dropouts

Explains CNN:

Servicers place troubled borrowers in trial modifications for several months to verify their income and see whether they can make the lowered payments.

Reasons homeowners got the boot:

  • Some weren't making the new, lower payments.
  • Others earned too much money to keep qualifying for the assistance.

Data for the first quarter of this year, released Tuesday, show progress: Lenders are making more modifications, says an article by MarketWatch.

Here's how HAMP works: Rather than subsidize homeowners directly, the government pays lenders and servicers (companies that collect mortgage payments) to reduce a loan's principal. For example HAMP pays half of a principal reduction.

 

HAMP also pays incentives -- like $1,500 per loan to participating lenders and $500 to servicers for modifications done on loans that are not in arrears. Other bonuses encourage lenders to modify more severely troubled mortgages.

 

Borrowers who flunk the HAMP trials aren't always left in the lurch. About half have gone on to get modifications from their banks, the Post reports. But the bank modifications can be less generous and more expensive, adding to concerns that the modifications may not stick.

 

Still unstable

That's the big concern -- that modifications may not be stabilizing things.

 

Most borrowers whose payments were lowered under the federal program will default within 12 months, The Wall Street Journal reported last week. Its source: analysis by Fitch Ratings Ltd. done on loans modified before the government program began a year ago. Fitch, however, expects the government-subsidized modifications to produce the same results.

 

The Journal says:

Diane Pendley, a managing director at Fitch, said the failure rate was likely to be high largely because most of these borrowers were mired in credit card debt, car loans and other obligations.

In Fitch's study, more than half of those with modified mortgages fell behind on payments within 12 months; homeowners whose payments were cut by 20% or more performed slightly better.

 

But most modifications make relatively small changes in mortgage payments, leaving homeowners with little money for food, clothing or such emergency expenses as medical care and car repairs, the Journal reports.

"The borrower remains in a very high-risk situation," Ms. Pendley said in an interview. "The other debts don't go away."

Turning the tide of foreclosures is proving a complex, messy undertaking. The Treasury Department defends HAMP as "making a real difference in the lives of hundreds of thousands of homeowners."

And Pendley appeared to agree, telling the Journal that "if you can save one-third of the borrowers, I think it is worth the exercise." HAMP also has set a uniform standard for lenders to follow. Before, their modifications were all over the map, she said.

 

Besides supporting modifications, government is tackling housing on other fronts, including tax credits for homebuyers. The Post reports:

"The housing market is significantly better than anyone predicted a year ago," Housing and Urban Development Secretary Shaun Donovan said during a conference call with reporters. "Obviously we're not out of the woods. Our housing market remains fragile."

This week, Congress is looking at whether to help unemployed people make their mortgage payments. A measure, part of financial reform legislation, envisions spending $3 billion to make homeowner loans of up to $60,000 at 1% to 2% interest.

 

The Boston Herald reports:

"This is not about helping people who took out mortgages that they should not have received," said co-sponsor U.S. Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee. "This is about helping people who made a perfectly reasonable decision to get a mortgage but never figured they would face the worse [sic] recession in a generation."

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