Better Performance Metrics
Next, SIGTARP takes issue with the Treasury measuring its success by trials extrended instead of permanent modifications. That also sounds familiar. The report says:
Measuring trial modification offers, or even actual trial modifications, for that matter, is simply not particularly meaningful. The goal that should be developed and tracked is how many people are helped to avoid foreclosure and stay in their homes through permanent modifications.
I agree. It recommends more specific goals to focus on other aspects of modification like servicer processing times, modification to servicer loans in default or total foreclosures ratios, rates of borrowers falling out of the program prematurely and re-defaults.
Public Service Campaign
This is one of the few recommendations that I don't really agree with. The report worries that troubled homeowners aren't aware of HAMP. I don't have extensive experience with those facing foreclosure, but those who I have talked to in that predicament are well aware of HAMP. Indeed, they're desperately seeking any option that could help their situation. It's become relatively common knowledge that the government is trying to prevent foreclosures, and by knowing that it's pretty easy to make your way to details of the program with a few phone calls or mouse clicks.
Income Verification Changes
SIGTARP doesn't like that the Treasury provides flexibility for income verification at the discretion of the servicer. There's a worry that some servicers might have inadequate methods for income verification or even experience a general desire to accept weak verification due to the pressure to modify mortgages. I think this is sensible. Re-default could be a problem if servicers aren't all requiring legitimate income verification.
Significant Re-default Risk
Speaking of which, SIGTARP is very, very worried about re-default. In its initial summary, the report says (my formatting):
Looking forward, even if HAMP results in the estimated 1.5 to 2 million permanent modifications, the program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway. Several aspects of HAMP's design make it particularly vulnerable to re-defaults.
- First, a borrower's non-mortgage debts (which could prevent a homeowner from staying current on even modified mortgage payments) are neither factored into the modified payment calculation nor will they exclude borrowers from participating in HAMP.
- Second, borrowers may be unable to meet the increasing monthly payments if their income has not increased commensurate with the interest rate adjustments that begin once the five-year modification period is concluded.
- Third, even if borrowers receive a HAMP permanent modification on their first lien, for the estimated 50 percent of at-risk borrowers, the total monthly mortgage payments might still be unaffordable if the second lien is not also modified or extinguished; only recently has Treasury been able to sign up servicers to Treasury's second lien program.
- Finally, given the prevalence of negative equity in mortgages eligible for modification, re-defaults resulting from negative equity, including strategic defaults, may be a factor as borrowers decide that it makes more economic sense for them to walk away from their mortgages notwithstanding the lower payments.
These are all very serious problems. The first renders the affordability calculation essentially useless. The second basically makes the modified loan a kind of option adjustable-rate mortgage -- and we know how badly those can turn out. The third I have worried about before; again, it could mean that the modification is not affordable for the borrower. The last fear boils down to borrowers not wanting to be underwater: principal reduction is the only way to deal with this problem if you want to be more confident that you can prevent foreclosure.
Will we see any changes based on the SIGTARP report? Time will tell, but Treasury only agreed with the report's first three findings. So don't expect any changes to the last two. In other words, look for lots of re-defaults over the next few years.
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