Government Mortgage Modifications Continue to Trickle In

Although everyone is focused on the latest confusing unemployment report today, another monthly report was also released by the government: its March update on the Obama administration's mortgage modification program. "HAMP" largely followed the same path it's been on for eight or so months now. New trial modifications continue to come in at a trickle, while permanent modifications rose a bit.

Here's the key chart, showing the program's month-to-month performance over the two years it's been around:

The month's tally of 22,000 new trial modifications matches the program's monthly low. But its 36,432 modifications made permanent is the highest number since July. As servicers work through the aged trial modification population, however, the number of modifications that are made permanent each month will have to drop below the number of new trials, consistently coming in at around 27,000 per month.

Cancellations also continue to decline. There were about 12,000 this month, which is the fewest since the cancellations began to soar as the program cracked down on servicers that weren't processing modifications quickly enough in early 2010.

In fact, performance of the permanent modifications looks pretty good so far. The Treasury provides the following chart (click to enlarge):

First, it appears that as the program ages, the loans perform better, as evidenced by the fairly consistent improvement in the first ("3-months") aging bin. You can see 60+ day delinquencies declining from 9.8% to 4.3% over the past six quarters. It's tempting to credit this to improving modification methodology. That may be part of the story, but the economy has also improved a great deal over this time period. As a result, these borrowers are likely faring better in recent quarters than they did in 2009, so they're managing to stay current on their mortgages more easily.

At this point, re-defaults in the range of 15% to 20% look quite good compared to what one would expect from mortgage modifications. But the big test has yet to come. This chart will get really interesting next quarter, when the Treasury begins telling us how these loans are faring after more than a year. Many of these loans will see interest rates bump up after that time, which will put pressure on borrowers whose incomes have not also risen. Once these modifications are more than a year old, we might start to see re-defaults creep up.