HAMP Outlook Brightens Thanks to Borrowers

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Barclays Capital has taken a fresh look at the Home Affordability Modification Program and has come away with a new perspective on home loan modifications. They can work — if the borrower isn’t exactly in dire straits.

That’s not good news for struggling homeowners who, for one financial reason or another, just can’t make their home mortgage payments. Recent numbers from HAMP administrators show “extremely low conversion rates” from trial home loan modifications to permanent modifications. Moody’s Investors Services estimates that, currently, a successful home loan modification scenario is, at best, a 50-50 bet.

The numbers back that up. HAMP says that through April 30, it had successfully converted 300,000 permanent U.S. home loan modifications, but had canceled 277,640 trial modifications. To be fair, not every canceled loan modification is a failure. Some struggling homeowners regain their financial balance after a layoff or other hardship and resume making their mortgage payments in full once again. But most canceled loan modifications have a sad, but simple reason: the homeowners just don’t have enough money to pay their mortgages.

Says Moody’s in a recent analyst report on HAMP efforts; “We believe the low conversion rate is a combination of two issues: borrowers failed to provide the documents they promised, and the rate reduction and principal forbearance used under HAMP were not enough to motivate severely underwater borrowers to start paying again,”

Thus, it’s not hard to see how Barclay’s Capital draws a conclusion that loan modification candidates, who have demonstrated some ability to pay their mortgage and who aren’t “severely” underwater on their mortgages, represent the best prospects for HAMP success stories.

How do you describe “better” HAMP candidates? Barclays says that those homeowners who struggled along and kept making payments as long as possible before falling behind, can actually benefit best from the HAMP program. “

"These are borrowers who have managed to keep paying through times of severe economic distress and turned delinquent only recently," say Barclays analysts in the report. "We believe that these are inherently better quality [borrowers] who have a higher propensity to pay once modified."

Helping matters is a slight tweak to the HAMP paperwork process. As of June 1, the federal government wants to see completed paperwork from a loan modification candidate in-full and upfront before it allows that candidate entrance into a trial loan modification program. Such paperwork includes a request for modification and affidavit form; the Internal Revenue Service 4506T-EZ form, which gives servicers the ability to pull the borrower’s tax return; and two pay stubs from the borrower for proof of income.

That documentation demand tends to favor those “better” borrowers with a stronger personal financial balance sheet than someone who is way behind on their home payments and who may have seen a big decline in their credit scores.

Despite projections from groups like Fitch Ratings, who estimates that between 55% and 75% of HAMP participants to re-default on their mortgages, Barclays says “re-default rates on newer modification cohorts are improving every quarter.”

If Barclays is right, it seems that HAMP will go on and possibly grow stronger as it helps homeowners who are only slightly behind on their mortgages — candidates Barclays calls ‘stronger borrowers.”  But left unsaid is the tragedy unfolding for homeowners who are way behind on their mortgages — and apparently way beyond the helpful embrace of Uncle Sam these days.

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