The Wall Street Journal
By: Nick Timiraos
August 21, 2010
The Obama administration's loan-modification program appears to be running out of eligible borrowers who can qualify for restructured loans.
The number of homeowners who began government-sponsored loan-modifications in July grew by the slowest rate since the program began nearly 18 months ago and was dwarfed by the number of borrowers whose modifications were canceled.
Half of the 1.3 million modifications that have been extended to borrowers have been canceled since the program began, and around one-third, or around 422,000 borrowers, have received permanent loan modifications.
So far, the Home Affordable Modification Program, or HAMP, has helped hold back the shadow inventory of more than seven million loans that are delinquent or in some stage of foreclosure, which has helped home prices to stabilize over the past year.
In July, nearly 17,000 new trial modifications were started. More than five times as many borrowers saw their reduced-payment programs canceled, either because they failed to make payments, didn't provide necessary financial documents, or didn't meet qualification guidelines.
Still, it isn't clear how many of those borrowers will ultimately go through foreclosure. Among the top eight mortgage-servicing companies, around half of all borrowers who exit the government program end up receiving a modification or become current; just 15% are in some stage of foreclosure.
Under HAMP, lenders receive incentives to help troubled borrowers avoid foreclosure by reducing their mortgage payments through a combination of a longer term and a lower interest rate. Homeowners must make at least three "trial'' payments before the modification can become permanent.
In an effort to scale up the program quickly, officials initially prodded banks to begin trial modifications without obtaining supporting documents to make sure borrowers were eligible. That has produced a high rate of modifications that are ultimately canceled, and the Treasury Department earlier this year began requiring banks to qualify borrowers before beginning the trials.
The Treasury warned on Friday that cancellations will exceed the number of new modifications for the next few months as banks "clear their backlog of aged trials.''
Officials said it was unfair to write off HAMP as a failure because they say it has forced the mortgage industry to focus its efforts to provide sustainable loan modifications.
"This program has actually been transforming the mortgage-servicing industry," said Herbert Allison, assistant Treasury secretary.
For example, prior to HAMP, the majority of modifications left borrowers with loan payments that were the same or higher than what they had been paying. HAMP is designed to substantially lower monthly payments, with the average borrower receiving a monthly payment reduction of $500.
"What we see now is that the [private-sector] modifications are modeled on the HAMP modifications,'' Mr. Allison said. "They're providing affordability modifications for the very first time.''
Critics say that is little comfort considering the massive amounts of time and effort that have been put into the program, which officials initially said would help at least three million homeowners.
"They should be ashamed of themselves. They've blown it from the beginning," said Kenneth Rosen, a professor of economics and real estate at the University of California, Berkeley. "It's embarrassing."
Meanwhile, the focus on lower payments could lead to rates of re-default that are better than other modification programs. But borrowers who receive a permanent modification still have lots of other debt: the median ratio of total debt payments to pretax income stands at 63.5%.
At least 20% of borrowers with permanent modifications are likely to re-default, primarily because of those high debt levels, says Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York.
--Darrell A. Hughes contributed to this article.
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