Home -> Law Blog Directory -> Bankruptcy Blogs -> Bankruptcy Law Network

Bankruptcy

: Bankruptcy Law Network

HAMP Mortgage Modifications and Bankruptcy

By L. Jed Berliner, Springfield & Marlborough, MA Ban

HAMP, the Home Affordable Modification Program which can modify a mortgage, is no way to avoid bankruptcy.  It’s a heart-breaker.  It builds up false hopes and then destroys them.  That’s my conclusion from reading the new Congressional Oversight Panel report.

I haven’t written on HAMP because I’ve questioned its relevance to bankruptcy, but a number of clients have suspended a bankruptcy filing pending a modification application or just have hung their hats on a modification to save their unaffordable home instead of moving on with a true fresh start.

The Report notes the current situation of 250,000 foreclosures initiated each month but only 100,000 complete.  This leaves another 150,000 homes and owners in limbo each month, many still hoping for the modification who delayed a bankruptcy from a fear that it will affect the application.  It also leaves many owners without a true fresh start after a bankruptcy because they remain liable for slip-and-fall injuries until foreclosure.  It leaves many owners suffering the emotional upset of uncertainty. 

10% of all mortgages are delinquent, and another 4% are somewhere in a foreclosure process.

The Report tells us that about 750,000 foreclosures will be stopped instead of the original 4 million target.  It failed because (1) Servicers, who must make delinquent payments, do better with a foreclosure than a modification, (2) Second mortgagees do better because so many modifications increase principal balances, (3) No one holds servicers accountable when applications are repeatedly lost or simply refused to be processed.

About a third of the 1.4 million trial modifications became permanent.  They peaked in 10/09 at 160,000 and are now at 23,000 per month.  21% of permanently modified mortgages redefaulted in their first year.  This is AFTER the trial period and the owner’s rebudgeting to make reduced payments.  It’s predicted to grow to 40% in the first five years, and then the interest rate can increase.  The redefault rate will exceed the new permanent approval rate.

A successful modification reduces interest from the median 6.63% to 2.0%.  57% extend the length of the mortgage.  30% defer principal to a balloon payment at the end, and only 3% actually reduce principal.

95% of permanently modified mortgages are more under-water, have greater negative equity, then before modification.  I call these borrowers “renters”, since many will face unaffordable balloon payments at the end and equity will build up very slowly if at all.  Negative equity restricts one’s ability to relocate for employment and encourages defaults.

Wachovia’s success rate is 89%.  HomeEq’s is 95%.  Bank of America’s is 30%.  Poor and nonstandard reporting prevents learning the reasons for the variances.

30% of the trial modifications were canceled due to incomplete documents.  (Or simply lost, perhaps intentionally because foreclosure is more profitable, but remember that the reporting is not reliable.)  21% of trial modifications simply defaulted.  8% were canceled without reason.

Liked This Article? Why Not Share It?emailLinkedInDiggStumbleUponFacebookGoogle BuzzTwitter

Full post as published by Bankruptcy Law Network on December 27, 2010 (boomark / email).