27 Dec HAMP Mortgage Modifications and Bankruptcy
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 andthendestroys 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 unaffordablehome 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 modificationwho delayed a bankruptcy from a fear that it will affect the application. It also leaves many owners without a truefresh start after a bankruptcy because they remain liable for slip-and-fall or other 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 with a foreclosure 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 makereducedpayments. It’s predicted to grow to 40% in the first five years, and then theinterest 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 willbuild 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%. Poorand nonstandardreporting 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.
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