Why To Worry About Government Mortgage Modifications

The re-default rate on modifications done through the government's HAMP mortgage modification program remains elusive. But a recent analysis from Laurie Goodman from Amherst Securities suggests that it could be worse than the re-default rate of other non-government modification programs that appear comparable. Here's why:

While the HAMP program will show a relatively low re-default rate, the real success rate (32% or so) will be lower than what was historically experienced for modifications with a similar payment reduction. Why slightly lower? HAMP considers only front-end [Debt to Income] DTI (1st mortgage payment + taxes + insurance). Most servicers in their proprietary modification programs have attempted to work with borrowers to reduce their back-end DTI (1st + 2nd mortgage, taxes, insurance, credit card payments, auto loans, etc). Others have declined to modify borrowers where backend DTI is an impossible obstacle. HAMP does not use back-end DTI as an input; HAMP encourages borrower's who have back-end DTIs >55% to seek credit counseling, but it is not clear this is enforced. We know that of the HAMP modifications that have become permanent, the borrower's back-end DTI went from 80% before the modification to 65% afterwards (a still unsustainable level!).

Read the full story at the Financial Times' Alphaville.