Government Still Struggling With Mortgage Modifications

Five times as many struggling homeowners dropped out of the Treasury's mortgage modification program as entered it last month. The Home Affordable Modification Program (HAMP)'s May report (.pdf) shows the effort continues to struggle, as fewer borrowers obtain trial and permanent modifications, and more drop out. The program's trajectory seems pretty clear from the following chart:

In May, just 30,099 more borrowers obtained trail modifications, fewer than April's low. We also saw the first dip in modifications made permanent, with just 47,724 more during the month -- the fewest since December. But the news is actually worse than this.

The report also says that 152,056 trial modifications were cancelled during the month. That's more than April's total cancellations of 122,467. May's number brings the total number of ended trials to 429,696. Meanwhile, only 340,459 trials have been made permanent.

Speaking of permanent modifications, May saw an additional 2,613 cancelled, bringing the grand total of cancelled permanent modifications to 6,357. Of course, far more will ultimately fail. Fitch recently estimated that somewhere between 55% and 75% of the modifications made permanent will re-default after 12 months. That means its best-case scenario is that 153,206 of those made permanent succeed. That's a 12% success rating in terms of the 1.2 million trials started. Yet considering the 3.2 million universe of eligible loans, the program's performance is even worse -- a mere 5% success rate. And remember, that's Fitch's best case.

According to the report, one major problem is that borrowers prefer private modifications to those offered through the government. Another is, no doubt, that so many prefer not to modify underwater mortgages. As you might expect, this means principal reductions aren't panning out as was hoped. In the May report, we learn that the portion of modifications that utilize principal forbearance has only risen to 28.8% from 27.6% back in March, when the changes to the program to accommodate principal reductions were announced. Banks must not be embracing those changes.

The Treasury added a few pages this month on servicer performance. One includes compliance testing. The report brags that its staff found that only 3.9% of the reviews showed the servicers should have acted differently. Yet, let's look a little closer at the chart it provides:

As you can see, more than 20% of the reviews were inconclusive. So really, only around 75% of the modifications passed compliance testing. That's not bad, but it's also not the 96.1% compliance score the report implies. It's unclear why so many reviews could not be completed, particularly for a program that claims to strive for ease and transparency.

The HAMP continues to appear to be winding down. At this point, it's hard to see how the $75 billion allocated could be well-spent. It doesn't appear that many more trials will be offered. Even if all current trials are made permanent (and that's highly unlikely, given how many dropouts we're seeing), then a total of 808,131 would result, if combined with those already permanent. Using Fitch's best-case 55% re-default assumption that would mean 363,659 successful permanent modifications total. If all funding is spent, that would break down to $206,237 per modification. At that cost, why not just pay off all those mortgages in full?