More than 85 percent of mortgage loans are now covered by the Obama administration’s Home Affordable Modification Program, meaning loan servicers must determine whether foreclosing on a home might prove more costly than offering a loan modification to a troubled borrower.
A total of 47 loan servicers were participating in the HAMP program at the end of August, up from 38 in July, and the program is on track to meet a goal of 500,000 loan modifications by November, the Treasury Department said in releasing its latest report on the performance of participating loan servicers.
At a congressional hearing today, a Treasury Department official acknowledged that there’s room for improvement in the program, which critics say will do little to help stem the rising tide of foreclosures driven by increased unemployment.
One in five of the 3 million borrowers the government estimates are eligible for HAMP have been offered trial modifications, the government said in its second monthly report on the performance of HAMP loan servicers.
Four loan servicers — Saxon Mortgage Services Inc., Nationstar, GMAC Mortgage Inc. and J.P. Morgan Chase — have begun trial loan modifications on at least 25 percent of loans they service that are 60 days or more delinquent and HAMP-eligible.
But some other large servicers, including Bank of America and Wells Fargo, have made offers to a smaller percentage of eligible borrowers.
Bank of America, which has the largest number of eligible 60-day-delinquent loans among loan servicers participating in the HAMP program — 835,000 — had started trial modifications on only 7 percent of those loans through August, the report said.
Wells Fargo, the third-largest servicer participating in the HAMP program, had initiated trial modifications on 11 percent of the 292,000 60-day-delinquent loans the Treasury Department said were HAMP-eligible.
All in all, participating HAMP loan servicers had started trial modifications on 12 percent of the 3 million 60-day-delinquent loans that the Treasury Department has identified as potentially eligible for HAMP, up from 9 percent in July, the report said.
Many other loans, including those not yet in default, are also eligible for the HAMP program, but the Treasury Department is using the percentage of trial modifications initiated on 60-day-delinquent loans as a metric for comparing the performance of loan servicers.
All told, offers of trial modifications have been extended to more than 571,000 borrowers, and 360,000 trial modifications are under way, the Treasury Department said.
‘Scaling up’ HAMP
There are "clear signs" that $75 billion in financial incentives offered to loan servicers and borrowers under HAMP are having "a substantial effect," and that the program will hit a target of 500,000 trial modifications by Nov. 1, Assistant Secretary for Financial Institutions Michael S. Barr said in his prepared testimony to a housing subcommittee of the House Financial Services Committee.
Barr said three challenges remain in "scaling up" the program: capacity, transparency and borrower outreach.
Loan servicers will have to add more staff than previously planned, expand call-center capacities, provide a process for borrowers to escalate servicer performance and decisions, bolster training of representatives, enhance online offerings, and send additional mailings to potentially eligible borrowers, Barr said. …CONTINUED
He said the Treasury is working with servicers and Fannie Mae to streamline the application process and develop a Web portal to serve as a centralized point for submitting and checking the status of loan-modification applications.
To provide more transparency, Barr said in the future the monthly reports on HAMP loan servicer performance will likely track metrics such as average borrower wait time, the quality of information provided to applicants, procedures for document processing and review, and response time for completed applications.
Mary Coffin, executive vice president for Wells Fargo Home Mortgage Servicing, urged the government to finalize a HAMP program for second loans, streamline HAMP documentation requirements, provide incentives for short sales, and revise the HOPE for Homeowners FHA refinance program.
In her prepared testimony, Coffin said her own discussions with Wells Fargo customers make it clear many are struggling to meet changing program requirements and provide the necessary documentation. It’s been a challenge to get clear, timely instructions to borrowers, Coffin said, as "the guidelines and the requirements for the various programs have continued to change."
Borrowers’ expectations were raised when President Obama announced the HAMP program on Feb. 18, Coffin noted. The Treasury Department didn’t outline details of the program until March 4, and guidelines for loans not owned or guaranteed by Fannie Mae and Freddie Mac weren’t released until April 6.
Fannie Mae then revised its HAMP guidelines on April 21. The Treasury Department announced additional details including trial modification requirements on July 6 and released FHA guidelines on July 30. Home-price depreciation incentives were announced July 31, and the Treasury Department may in the future introduce programs tailored for option-ARM (adjustable-rate mortgage) loans and short-term modifications, Coffin noted.
The Treasury Department announced in May that in the future, HAMP would provide incentives for short sales and deeds-in lieu of foreclosure when borrowers were unable to complete the HAMP modification process.
Borrowers who agreed to a short sale or deed-in-lieu would get up to $1,500 to assist with their relocation expenses, and loan servicers will earn up to $1,000 for successfully completing a short sale or deed-in-lieu of foreclosure (see story).
RE/MAX Chairman and Co-Founder Dave Liniger met with U.S. Housing and Urban Development Secretary Shaun Donovan on Friday to discuss streamlining the short-sale process.
"Secretary Donovan has a very good understanding of how short sales can help this market," Liniger said in a press release, adding that he expects an announcement will be made soon about procedures to facilitate a streamlined short-sale process.
Since her last appearance before the subcommittee in February, Coffin said there’s been a 200 percent increase in borrowers requesting assistance, with up to 40 percent of those current on their mortgages, Coffin said. Wells Fargo has boosted its "home retention" staffing by 4,600 employees, and now has more than 12,000 workers engaged in efforts to help borrowers avoid foreclosure, she said.
Loan servicers participating in HAMP are required to service all loans in their portfolio according to HAMP guidelines, unless they are explicitly prohibited by pooling and servicing agreements governing loans that have been bundled into securities and sold to investors.
Coffin said 79 percent of the mortgages Wells Fargo services are held by other investors. Those include nonprime loans not originated by Wells Fargo, which are handled under the name "America’s Servicing Company."
Before foreclosing on a HAMP-eligible loan, servicers must evaluate it using a standard net present value (NPV) test, which compares the net present value of cash flows with modification and without modification.
If the NPV test is positive, the servicer must modify the loan, reducing the borrower’s mortgage payment to no greater than 31 percent of gross monthly income by reducing the interest rate to as little as 2 percent, extending the term of the loan to up to 40 years, or reducing principal. …CONTINUED
As an incentive, HAMP provides matching dollars to help lenders reach the 31 percent debt-to-income threshold. The program also pays loan servicers $1,000 up front for each successful modification, and up to $1,000 per year for five years if the borrower remains current. Homeowners can also earn up to $1,000 a year in principal reductions for five years if they remain current.
When borrowers aren’t eligible for the HAMP program, Wells Fargo is offering "customized modifications" that result in reduced payments in more than eight in 10 cases, Coffin said. When payments stayed the same or increased, borrowers could afford their monthly payments and needed only short-term assistance to get current again, or there were investor restrictions that prevented Wells Fargo from making a loan modification that would result in reduced monthly payments.
What about unemployed?
While the Obama administration remains hopeful that the HAMP program will generate 3 million to 4 million loan modifications, it’s important to consider that the program will help borrowers who need help the most, said Paul S. Willen, a senior economist and policy adviser for the Federal Reserve Bank of Boston.
"A program that offers monetary incentives to do as many modifications as possible and to minimize the probability that modified loans redefault may not in fact prevent many foreclosures," Willen said in his prepared testimony.
That’s because the easiest way to ensure that a borrower doesn’t redefault is to choose a borrower who was unlikely to default in the first place, Willen said.
"Thus a servicer could make minor modifications to millions of loans to perfectly creditworthy borrowers, collect large sums from the government and then collect even more as the borrowers continue to repay the loan," Willen said. "Anecdotal evidence from borrower testimonials suggest that individual loan officers have engaged in precisely this practice."
Barr said HAMP’s loan-modification guidelines were crafted to prevent loan servicers from "cherry-picking" which loans to modify while denying assistance to borrowers at greatest risk of foreclosure.
Beginning Oct. 1, he said, loan servicers will be required to disclose to the Treasury and to borrowers the reason for any denied modifications.
Willen was among the authors of a paper published in July that found only 3 percent of seriously delinquent borrowers received loan modifications involving a concession in 2007 and 2008, before the HAMP program was launched (see "Why don’t lenders renegotiate more home mortgages?"). Less than 8 percent received any type of workout at all, the study found, with most modifications involving increases to principal balance as arrears were tacked on to the back of the loan.
Lenders not only fear redefaults, Willen said — between 30 and 45 percent of borrowers who received loan modifications were delinquent again within six months — but providing assistance to borrowers who don’t really need help. Nearly one in three delinquent borrowers studied "self-cured," or started making mortgage payments again without receiving a loan modification, Willen said.
The government would get the biggest bang for its foreclosure-prevention buck by providing direct assistance to borrowers rather than to loan servicers, Willen said.
To be effective, he said, a foreclosure-prevention plan "must address the problem of unemployed borrowers. A modification that only modestly reduces the monthly payment will never be a workable proposition for a borrower with no income."
Grants or loans to unemployed borrowers to help them cover their housing expenses "until they get their feet back on the ground would prevent large numbers of foreclosures," he said. He noted that researchers at the University of Wisconsin have proposed offering housing assistance to all victims of unemployment, whether they own or rent.
Analysts project more than 6 million families may face foreclosure over the next three years, Barr said. Even if HAMP is a total success, "we should still expect millions of foreclosures," he acknowledged.
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