Bailout

Loan-modification failure of the day

By Felix Salmon

As of today, Treasury has started releasing a new set of datapoints with respect to its Making Home Affordable program. Look at page 5 of the monthly report on how the program is doing, and you’ll see a page detailing what they call the “disposition path” of the 194,056 trial mortgages which have been cancelled through April. Here’s the chart:

The first thing to note is that the enormous number of failed trials — to put the number in context, there were only 299,092 permanent modifications started through April — is not a sign of good news, where the borrowers have exited the trial by paying off their mortgage. That only happened 1.1% of the time.

Instead, depressingly, by far the most common reason for abandoning the HAMP trial is “Alternative Modification” (48.9%). Cue desperate Treasury spinning, in a press release entitled “Impact of Administration Efforts Seen in Signs Of House Price Stabilization and Increased Affordability”:

Nearly half of homeowners unable to enter a HAMP permanent modification enter an alternative modification with their servicer, and fewer than 10 percent of cancelled trials move to foreclosure sale.

Remember that in these cases the HAMP modification is not only subsidized by the government: it was also entered into, after enormous amounts of paperwork, by both the borrower and the servicer. It’s hardly credible that after going through that laborious process, both of them would happily tear up the agreed-upon modification and enter into something more mutually beneficial instead.

Rather, I see here evidence that the HAMP modifications are so weak and so unhelpful that there’s far too little incentive for borrowers and lenders to stay in them. And of course we know why that would be: such modifications almost never make a significant dent in the principal amount outstanding, and as a result homeowners who are underwater on their mortgage simply remain underwater on their mortgage, with the concomitant enormous probability of redefault.

As Ryan Avent put it on Monday, in the wake of atrocious numbers from the National Association of Home Builders,

A durable solution to the crisis in housing needed to involve an answer to the epidemic of negative equity and a meaningful labour market recovery. America has neither. And so the outlook for housing will be a bleak one for the foreseeable future.

Does Treasury grok this? There’s no indication that it does.

Full post as published by Macroprudential on July 21, 2010 (boomark / email).