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See also mortgage lending and mortgage modification.


Administration mortgage programs - HAMP

The Obama Administration’s Home Affordable Modification Program (HAMP), part of its effort to stabilize housing markets and to help struggling home owners, includes approximately 375,000 borrowers that are currently in the trial modification program.

Today, the U.S. Department of the Treasury (Treasury) and the Department of Housing and Urban Development (HUD) kicked off a campaign to assist borrowers that are in the trial phase of their modified mortgages to convert to permanent modifications by ensuring that all such eligible borrowers have access to necessary information and assistance.

"There’s a key word missing in the below press release on the US Treasury’s Hamp programme:

WASHINGTON - Today, the Obama Administration released the next monthly report for the Making Home Affordable (MHA) loan modification program. As part of an ongoing commitment to transparency, the report includes for the first time state-specific trial modification numbers. With more than 650,000 modifications under way across the country, the program is on track to meet its goals over the next several years.

Have you spotted it?

It’s `trial.’ 650,000 trial loan modifications are under way across the country, up from the circa 490,000 trial mods reported in September.

Under the Home Affordable Loan Plan, the Treasury, in an effort to halt the steady march of US residential foreclosures, pays mortgage lenders and servicers, including the banks, to agree to modify loan terms for homeowners. The lender agrees to reduce monthly payments for the homeowner in a “trial” modification period lasting three months, which is then hopefully made into a permanent payment reduction plan.

The permanent bit is important since the trial mods have the effect of increasing banks’ delinquency rates but decreasing net credit losses. If the trials become permanent, the loans jump out of the delinquency bucket and return to current status. But if they don’t become permanent, the credit-loss-mitigating benefit quickly evaporates. The loans (probably) go into default and the bank simply forecloses on the properties — pushing up their credit losses.

As of September 1, just 1,711 of those 490,000 loan mods had been completed, according to a New York Times article. The apparent fact that so few of the trial mods have become permanent has been one of the prime criticisms of the programme. One of the other criticisms is that redefault rates for Hamp modified-mortgages could well end up being as high as for non-modified loans. The Treasury hasn’t provided much guidance on redefault rates either.

Reportedly the info on permanent mods, if not the redefault rate, is coming.

In the meantime though, here’s a link to the full (October) Hamp Servicer Report and a nice set of maps depicting the geographical dispersion of (trial!) Hamp modifications. [see above for maps]."

"The Obama administration unveiled steps to help state and local housing-finance agencies provide mortgages and rental housing to thousands of low- and moderate-income families, underscoring the expansive role the government has taken to stabilize the U.S. housing market.

State and local housing-finance agencies, or HFAs, play a modest role in the housing market but represent one of the few sources of mortgages for many first-time and low-income home buyers. The federal aid is designed to revive HFAs' lending by shoring up their financing. State agencies sharply curtailed their lending after the credit crunch deepened one year ago.

Tax-exempt bond issuance by HFAs has fallen to $4 billion in 2009 from $10 billion last year and $16 billion in 2007, according to the National Council of State Housing Agencies.

"This initiative is crucial to helping working families maintain access to affordable rental housing and homeownership in tough economic times," Treasury Secretary Timothy Geithner said.

Under the program, the Treasury Department will purchase securities from Fannie Mae and Freddie Mac that are backed by state and local housing-agency bonds. Before using the proceeds of new bonds under that program, the HFAs will have to sell a portion of new debt to private investors in an effort to attract private capital to the market.

The Obama administration may adjust its mortgage-modification program to help lower-income Americans with housing payments deemed affordable under current standards, executives at the two largest loan servicers said.

The change would be meant to boost the amount of borrowers able to qualify, by allowing debt to be reworked for certain homeowners with mortgage bills already below 31 percent of their pretax incomes, Wells Fargo & Co.’s Mary Coffin and Bank of America Corp.’s Barbara Desoer said in interviews this week at a mortgage conference in San Diego. That’s the level loans get restructured to now in the program.

Officials are studying ways “to appropriately expand the universe of those who are eligible to more of those who are in a position of needing government help to get through temporary stress,” Desoer, the head of the Charlotte, North Carolina- based Bank of America’s home-loan unit, said.

The step is one of several under consideration or announced that would refine the $75 billion Home Affordable program in a bid to do more to reduce the 7 million looming foreclosures that Amherst Securities Group analysts say will probably renew home- price declines.

“Certainly there are circumstances where it probably makes sense” to cut payments to “extremely” low levels “but on the other hand, what else is the borrower spending their income on?” said Steven Horne, former director of servicing-risk strategy at Fannie Mae whose Carrollton, Texas-based distressed- loan specialist Wingspan Portfolio Advisors LLC focuses on loan workouts tailored to individuals’ circumstance.

Treasury, HUD release March HAMP data

"Yesterday, the U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) released the April report on the Home Affordable Modification Program (HAMP). Through the end of March, more than 1.4 million homeowners have received offers for trial modifications (an increase of 300,000 over last month), and more than 1.1 million borrowers are receiving median savings of $500 per month.

More than 230,000 homeowners have received permanent modifications (compared to a total of 170,000 last month), and an additional 108,000 permanent modifications have been approved. These lower monthly mortgage payments under HAMP represent cumulative savings of more than $3 billion.

Top Senate member questions HAMP program

The second-ranking Democrat in the Senate expressed concern Thursday over the ultimate effectiveness of the Obama administration's signature foreclosure-prevention effort, becoming the highest-ranking member of the president's party to publicly question the administration's efforts to help struggling families.

The administration announced in March that its initiative, the Home Affordable Modification Program, will begin in several months to help unemployed homeowners and those who owe more on their mortgage than their home is worth. The unemployed are eligible for temporary relief from monthly payments; underwater homeowners are eligible for reductions in mortgage principal.

In a Senate hearing, Assistant Majority Leader Dick Durbin told Treasury Secretary Timothy Geithner that he's "concerned that these changes don't go far enough to help unemployed and underwater homeowners."

"Under the current plan, servicers may still have more incentive to foreclose rather than to modify mortgages, and many borrowers will still find that default may be easier than staying underwater," the Illinois Democrat said. "These changes won't be implemented until the fall, and may be too little, too late."

House Oversight Committee hearing March 25

On Thursday, March 25, 2010, the House Committee on Oversight and Government Reform examined the execution and impact of the Department of the Treasury's (Treasury) foreclosure prevention efforts, with particular attention to the Home Affordable Modification Program (HAMP). The hearing entitled: “Foreclosure Prevention: Is the Home Affordable Modification Program Preserving Homeownership?” took place at 10:00 a.m. on Thursday, March 25, 2010 in room 2154 Rayburn House Office Building.

Connect to the Live Webcast

The witnesses scheduled to testify were:

  • Mr. Neil Barofsky, Special Inspector General, Troubled Asset Relief Program (Testimony)
  • Mr. Gene Dodaro, Acting Comptroller General, Government Accountability Office (Testimony}
  • Mr. John Taylor, President and CEO, National Community Reinvestment Coalition (Testimony}
  • Mr. Mark Calabria, Director of Financial Regulation Studies, Cato Institute ([ Testimony]}
  • Mr. Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, United States Department of Treasury

In response to the dire state of the housing market, the Administration announced a comprehensive set of programs to strengthen the housing market and provide relief to struggling homeowners:

Actions Supporting Market Stability and Access to Affordable Mortgage Credit

  • Provided strong support to Fannie Mae and Freddie Mac to ensure continued access to affordable mortgage credit across the market;
  • Together, the Treasury and the Federal Reserve mortgage-backed securities (MBS) purchase programs have purchased over $1.4 trillion in agency MBS helping to keep interest rates at historic lows so homeowners can access credit to purchase new homes and refinance into more affordable monthly payments; and
  • The Federal Housing Administration (FHA) has played an important counter-cyclical role, providing liquidity for housing purchases at a time when private lending declined.

Actions Helping Homeowners Purchase Homes, Refinance and Modify Mortgages to More Affordable Payments, Prevent Foreclosures and Stabilize Communities

  • Launched a modification initiative to help homeowners reduce mortgage payments to affordable levels and prevent avoidable foreclosures;
  • Supported extending the temporary loan limits of $729,750 for Government Sponsored Enterprise (GSE) loans and FHA loans;
  • Expanded refinancing flexibilities for the GSEs, particularly for borrowers with negative equity, to allow more Americans to refinance;
  • Launched a $23.5 billion Housing Finance Agencies Initiative which is helping over 90 state and local housing finance agencies across 49 states provide sustainable homeownership and rental resources for American families;
  • Supported the First Time Homebuyer Tax Credit that has helped hundreds of thousands of responsible Americans purchase homes;
  • The Recovery Act is providing over $5 billion in support for affordable rental housing through low income housing tax credit programs and $2 billion in support for the Neighborhood Stabilization *Program to restore neighborhoods hardest hit by concentrated foreclosures; and
  • On February 19, 2010, the Administration announced the $1.5 billion Hardest Hit Fund for state housing finance agencies in the nation's hardest hit housing markets to design innovative, locally targeted foreclosure prevention programs.

House Oversight Committee hearing Feb 25

The Domestic Policy Subcommittee will hold a hearing titled: Foreclosures Continue: What Needs to Change in the Administration's Response?" The hearing will take place at 2:00 p.m. in room 2154 Rayburn House Office Building.

House hearing on mortgage foreclosures Dec 8

Witness List:

  • Ms. Molly Sheehan, Senior Vice President, Chase Home Finance
  • Mr. Jack Schakett, Risk Management Executive, Credit Loss Mitigation Strategies
  • Ms. Julia Gordon, Senior Policy Counsel, Center for Responsible Lending
  • Dr. Anthony B. Sanders, Distinguished Professor of Real Estate Finance, Professor of Finance School of Management, George Mason University
  • Ms. Laurie Goodman, Senior Managing Director, Amherst Securities, LLP
  • Mr. Bruce Marks, Neighborhood Assistance Corporation of America--(Testimony not submitted to date)
  • The Honorable Herbert M. Allison, Jr., Assistant Secretary for Financial Stability, U.S. Department of the Treasury
  • Mr. Michael H. Krimminger, Special Advisor for Policy, Office of the Chairman, Federal Deposit Insurance Corporation
  • Mr. Douglas W. Roeder, Senior Deputy Comptroller Large Bank Supervision, Office of the Comptroller of the Currency

Administration releases February loan modification report

The U.S. Department of the Treasury and the Department of Housing and Urban Development (HUD) today released February data for the Administration's Home Affordable Modification Program (HAMP). As of the end of the month, more than one million borrowers were receiving a median savings of $500 each month – a 36 percent median monthly payment decrease. Permanent modifications have been granted to 170,000 homeowners and an additional 91,800 permanent modifications have been approved by servicers and are pending only borrower acceptance.

The February HAMP report can be found here

Ohio AG sues Barclays over HAMP

Readers of FT Alphaville will know that the US government is hell-bent on making its Home Affordable Modification Plan, aimed at making loan modifications to help keep US homeowners in their houses, a success.

Financial incentives in the form of fees for each permanently-modified mortgage have been in place since the programme began, but added to the mix in recent months were the kudos of being seen to be helping homeowners, plus some generous capital risk-weightings for banks. On the `stick side’ of the equation you’ve got the general shame, and the threat of fines and increased government scrutiny.

Now you also have lawsuits.

From DSNews.com (emphasis FT Alphaville’s):

In an announcement Wednesday, Ohio Attorney General Richard Cordray said he has filed a lawsuit against New York-based Barclays Capital Real Estate, doing business as HomEq Servicing.

HomEq, a participant in the federal Home Affordable Modification Program (HAMP), has been accused of issuing unfair loan modification agreements and providing inadequate, incompetent customer service to Ohioans who were at risk of losing their homes to foreclosures. According to the lawsuit, Ohio homeowners in need of loan modifications through HomEq were forced to enter into one-sided agreements. These allegedly unfair and deceptive agreements released HomEq of all liabilities and required borrowers to pay additional fees and waive their right to defense.

In addition, HomeEq was accused of violating Ohio’s Consumer Sales Practices Act (CSPA) through incompetent and inefficient customer service. According to the lawsuit, HomEq failed to return customer calls or respond to repeated inquiries, lost borrowers’ document, and neglected to offer timely and affordable loss mitigation options to its customers.

Now, the lawsuit specifies “unfair” agreements and “inadequate” customer service, all of which the company strenuously denies, but the below quote from the Ohio Attorney General suggests there’s something else going on here; HomEq is simply not doing enough to make Hamp loan modifications (our emphasis):

“There has been ample time for loan servicers to strengthen their efforts and start making a significant difference in preventing home foreclosures,” Cordray said. “Unfortunately, many servicers have instead repeatedly chosen to aggravate the crisis through noncompliance and excuses. As I see it, for every excuse, hundreds of families become more vulnerable to losing their homes. In Ohio, we have zero tolerance for any more excuses.”

A quick glance at the Treasury’s December Hamp report shows that HomEq was one of the worst-performing servicers in terms of converting trial loan modifications into permanent ones, with 657 active trial mods and a whopping zero converted into permanent status.

That’s a pretty dismal performance, but bear in mind that some `bigger’ servicers, JP Morgan and Wells Fargo for instance, have a conversion rate of between just 3 and 4 per cent.

HAMP, second liens and mortgage writedowns

To recap: Writing down the second and other junior liens of mortgages, which would allow principal writedowns of underwater mortgages, would expose the stress tests of last year as a joke. There’s probably a hole in the balance sheet of the 4 big banks because they only recorded losses on second/junior liens at 15%. The second/juniors will continue to ‘perform’ because much of it is HELOC debt, which like a credit card you’ll never pay off, can have interest added to principal, without ever a real exit strategy to the debt.

So you have a decade of people underwater in their homes, unable to move to pursue new jobs, with the 1st mortgage owner willing to negotiate new terms but being blocked by the second mortgage owner, in order to pretend that the stress tests weren’t completely invalid. Instead we get the predatory lending shop called HAMP opening up, a failure for consumers and a nice little subsidy to the major banks. Everyone wonders why it isn’t working, and Treasury prays that the forbearance works and housing prices appreciate fast over the next few years and it all goes away.

So two new developments.

1) HAMP is even worse than you thought. Shahien Nasiripour, Watchdog: Obama Foreclosure Program Is Likely To Be A Failure

The most recent data show that on average, homeowners in HAMP owe $1.14 on their mortgage for every $1 in their home’s current market value, according to Treasury Department estimates cited in the report.

Yet the program doesn’t address this problem of negative equity — commonly referred to as being “underwater” — the report notes. The administration’s effort has been touted as a way to stem the rising tide of foreclosures by reducing monthly payments for up to four million troubled borrowers.

But one essential method of helping underwater homeowners — principal reductions — has not been addressed by the program. Mortgage servicers forgave principal on less than two percent of HAMP trial loans, the report notes. But before HAMP, 10 percent of servicer-sponsored mortgage modifications forgave principal, according to the report. Servicers are incentivized to lower monthly payments by getting cash for every sustainable mortgage modification.

“HAMP allows principal reduction, but it is not typically implemented in practice,” the report states.

This data had never been publicly disclosed prior to Tuesday.

The SIGTARP report on the HAMP program finds is that it might actually be reducing the number of principal reductions in the market. The average person applying to HAMP has 114% LTV on their home, so they are approaching the dangerous 120% LTV where strategic defaults skyrocket. And less than 2% of them get principal reductions. 2%! What’s the point of this again? There’s the desire to keep people in their homes, and there’s the desire to keep people in their mortgages. I think we are spending too much time and energy on the second while thinking we are doing the first.

2) I estimated what the stress tests would look like with 40% and 60% junior lien losses, and this is what I found:

A $150bn hole in the balance sheet of the major four players, which would have made the debates of last spring look a lot different. Now here’s housingwire from last week, Second-Lien RMBS Loss Projections Revised:

Moody’s Investors Service revised its loss projections for 2005-2007 second lien, subprime and HELOC-based US residential mortgage backed securities (RMBS).

Moody’s now expects cumulative losses to average approximately 25-55% of outstanding balance for non-subprime closed-end second (CES) pools, 70-85% for subprime CES pools and 40-50% for home equity line of credit (HELOC) pools. The revisions represent more than a 50% increase for expected cumulative losses on non-subprime CES, and nearly a 20% relative increase for subprime CES and HELOC pools.

Following the increased loss expectations, Moody’s placed on review for downgrade 948 tranches of second lien RMBS — representing all vintages — with an original balance of $113bn and an outstanding balance of $35bn.

Check out those numbers! Far worse than experts had thought. Is there still a major difference between retained junior liens on the books of the biggest players and the residential mortgage backed securities market (RMBS)? In the medium term, I bet those numbers are going to converge, and to the extent they don’t I bet it’s because the servicers are sweating the hell out of underwater mortgage holders.

HAMP phase II?

"Tuesday provided a veritable bonanza of info for any one following the US Treasury’s increasingly curious forays into mortgage modification.

The US House Financial Services Committee met to discuss the government’s response to the mortgage foreclosure crisis, the centrepiece of which is now the Home Affordable Modification Plan, or the Hamp.


Hamp is aimed at reducing interest payments and delaying principal payments for eligible homeowners. To do this they have to apply and then agree to enter a three-month trial period, in which they need to make the lower payments and submit some additional documentation (stuff like proof of income). If that’s done successfully, the homeowner is granted a permanent mortgage modification - with lower monthly interest payments and longer principal forbearance.

Only, a major problem of the programme is the number of permanent mods (or lack thereof) being completed.

To give you an idea of the problems the programme is facing, below is nice chart from the Tuesday testimony of Molly Sheehan, senior vice president at JP Morgan Chase Finance:

You can see that for every 100 Hamp trial plans initiated through April to September 2009, only about 20 borrowers managed to complete all the required documentation and were eligible for the modification. Of those 20, according to Sheehan, 15 will probably get a Hamp mod with a payment reduction.

Actual numbers, as you can see from the table, are even lower. Out of 199,033 mods offered in the period, just 4,302 have become permanent and completed.

The figures are similar over at Bank of America, the country’s biggest mortgage servicer (CHK). In his testimony, Bank of America Home Loans credit loss mitigation strategies exec Jack Schakett said that of 65,000 homeowners who have made the three trial payments, 50,000 have not submitted the right documentation. Those 65,000 trial mods are due to end on December 31.

Take Two

There are a number of reasons for the lack of conversion — negative equity, documentation, unemployment, etc. — most of which have been discussed at length. But it’s interesting that a movement towards something else - Hamp Take Two, if you like - seems to be gathering momentum.

In particular, the notion of principal forgiveness — not just forbearance — seems to be gaining a lot of support. The Federal Deposit Insurance Corporation, which is responsbile for insuring US bank deposits, for instance, said earlier this week that it might ask lenders to cut principal on mortgages.

And, like the Hamp itself, principal forgiveness would have an impact on banks.

Laurie S. Goodman, senior managing director of Amherst Securities, explained some of the potential effects in her testinomy to the Committee. She thinks principal forgiveness is the way to go, but financial conflicts of interest currently keep mortgage servicers from reducing amounts owed. Servicer fees are often based on the principal amount, for instance, and the servicers themselves are often owned by big banks — JPM, BofAML and the like — which also hold the second lien on the loans.

So there’s a built-in disincentive. Accordingly, Goodman recommends:

. . . moving principal reduction higher in the HAMP modification waterfall would be the most natural way to raise the success of the modification program. Would investors support this type of program? Absolutely! While a foreclosure is devastating to a borrower, it is also devastating to an investor — the recovery rate on a subprime loan is leass than 30 cents on the dollar. It is approximately 50 cents on the dollar for a prime loan with a 200-400k loan size. The interests of the first lien investor and the borrower are totally aligned. It would be completely reasonably to further incentivize the investor to reduce loan balances through a government sponsored plan to liquefy properly de-risked laons. These would be loans in which the borrowers have performed as expected for some reasonable period after modification.

… any principal reduction program requires the Adminstration to address the second lien problem head on. The solution is clear — the banks that own the second liens will have to write them down. The treasury may choose to pay an `extinguishment fee”; it may make sense to allow the banks to take the losses over time. But, for the sake of giving homeoweners the best chance to stay in their home, the second lien will have to be extinguished. It should be noted that second liens have thus far, under HAMP, been treated with kid gloves. The first lien modification program is fully operational, to the best of my knowledge the second lien program has not yet been implemented.

And if you think even with an `extinguishment fee’ the banks won’t go for principal forgiveness — much less second lien destruction — just have a look at the below testimony from Anthony B Sanders, distinguished professor of real estate finance at the Finance School of Management at George Mason.

He wants the principal forgiveness `carrot’ for financial institutions to be the ability to spread the losses in accounting terms for up to five years.

His reasoning:

When financial institutions and other holders of mortgages (investors) accept loan modifications, short sales and short payoffs, they take an immediate hit, causing them to reduce earnings and receive pressure from regulators to raise additional capital. To provide an incentive for financial institutions.investors to sell their distressed mortgage loans to the private markets, the government regulators, including the SEC, should allow financial institutions/investors to amortize the losses for up to 5 years to spread the accounting consequence of a loss over time. This would enable the financial institutions/investors to sell distressed assets from their books and free up funds to be invested elsewhere such as loans to small businesses.

While programs Like HAMP are meant to keep people in their houses, we need to provide an incentive to financial institutions to avoid becoming “zombie banks” as has occured in Japan. While the HAMP program might keep some people in their homes, the program maintains the loan with the lender and does not free funds for uses other than housing until the loan is paid off or refinanced. And with some of the 40-year extension of loan life for some of the modifications, this would mean that these loans would be on the balance sheets of the lenders/investors for almost half a century.

. . .

Accounting changes to permit financial institutions/investors to remove their distressed assets from their books clearly dominate alternatives such as “cramdowns” or other judicial interventions into the mortgage market. Helping financial institutions/investors dispose of their distressed assets was one of the original purposes of TARP and we should now consider the wisdom of cleaning-up fianncial institution balance sheets rather than judicial itnerventions.

If such proposals start to gain political support, the next generation Hamp could well be on its way.

Judging from the above - it might be even more interesting to watch than its original.


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