The Wall Street Journal
By: James R. Hagerty
June 16, 2010
Fitch Ratings Ltd. forecasts that most borrowers who get lower mortgage payments under a federal government program will default within 12 months.
Among those with loans that aren't backed by any federal agency, the redefault rate within a year is likely to be 65% to 75% under the Obama administration's Home Affordable Modification Program, or HAMP, according to a report to be released Wednesday by Fitch, a New York-based credit-rating firm. Almost all of those who got loan modifications have already defaulted once.
Diane Pendley, a managing director at Fitch, said the failure rate was likely to be high largely because most of these borrowers were mired in credit-card debt, car loans and other obligations.
The Treasury Department has said that among people who have been given loan modifications under HAMP, the median ratio of total debt payments to pretax income is still 64%. That often means little money is left over for food, clothing or such emergency expenses as medical care and car repairs.
"The borrower remains in a very high-risk situation," Ms. Pendley said in an interview. "The other debts don't go away."
A Treasury official said HAMP "is making a real difference in the lives of hundreds of thousands of homeowners." He said the government has reduced the risk of redefault by offering financial incentives to borrowers who remain current on loan payments.
Fitch based the redefault forecast on the performance of loans that were modified in the first quarter of 2009. Those modifications were done outside of HAMP, which took effect later in the year. But Ms. Pendley doesn't expect a major difference between the results of HAMP modifications and those made under lenders' programs.
Even if two-thirds of the loan modifications fail, Ms. Pendley said, that doesn't mean HAMP is a failure. "If you can save one-third of the borrowers, I think it is worth the exercise," she said. She also said the HAMP program, announced in early 2009, had provided a basic outline for loan servicers to follow in modifying loans. Loan servicers, often owned by banks, collect payments and handle foreclosures. Previously they were "all over the place" in their methods for dealing with foreclosures, Ms. Pendley said.
At the end of April, about 295,000 households were benefiting from long-term modifications under HAMP, which typically involves cutting the interest rate as low as 2%, according to the Treasury. Another 637,000 households were in trial modifications, under which they need to show they can make their new, lower payments consistently and provide documents proving they are eligible. Under the $50 billion HAMP program, the federal government provides financial incentives to borrowers, loan servicers and mortgage investors for modifying loans.
Andrew Jakabovics, an associate director at the Center for American Progress, a Washington think tank with ties to the Obama administration, said results of HAMP so far were mixed. Borrowers continue to complain that it often takes months, and sometimes more than a year, to get decisions from servicers on whether a loan can be modified on a long-term basis. Mr. Jakabovics said the program would work better if the government dealt directly with applicants for HAMP and decided which ones qualified, rather than delegating that function to servicers.
But Mr. Jakabovics said he didn't expect major changes in HAMP, which is scheduled to remain in effect through 2012. "For better or worse," he said, "what we've got now is what we're going to go with."