Permanent modifications are increasingly slowing, while September saw the sixth straight month of double-digit decreases in active trial modifications. Chicago region permanent loan modifications rose by 4.1 percent from August to September, compared to 9.2 percent growth from June to July and 6.6 percent growth from July to August (see charts A and B). Regional trial modifications fell by 14.1 percent from August to September, which is less severe than the 21 percent decrease from July to August.
Chicago region trends continue to mirror national patterns. Trial modifications dropped by 14.3 percent from August to September, and permanent modifications grew by 4 percent. Nationally, total modification activity fell by 1.7 percent from August to September.
As we noted in past months, the falling numbers of active modifications are likely due in part to the fact that many servicers did not require full income documentation before starting a trial modification; borrowers who do not qualify based on income are now being dropped from the program. Additionally, Treasury now requires that all servicers collect full income documentation before starting a trial modification, likely slowing the rate of new trial modifications.
While Treasury does not release data on trial modifications that have been cancelled on a regional level, it does release that data nationally. Of the 1.37 million borrowers that started trial modifications, more than half did not qualify for permanent modifications. The most common reason cited for denying a permanent modification is incomplete borrower documents. Given widespread reports of documents repeatedly lost by servicers, this reason raises questions about whether the program is turning away large numbers of otherwise eligible borrowers.
The Special Inspector General for the Troubled Asset Relief Program (SIGTARP) released a report this week sharply criticizing HAMP’s implementation. Citing a lack of transparency, low success rates, and failure to set meaningful goals, SIGTARP says that “a program that began with much promise now must be counted among those that risk generating public anger and mistrust.” SIGTARP criticized Treasury for counting all trial modifications, even cancelled ones, as successes under the justification that even a failed trial period allows a borrower to stay in their home longer. The report emphasized that if a borrower in a trial modification, which lasts longer than six months in 44 percent of cases, fails to qualify for a permanent modification, the consequences are not trivial. During the trial period, borrowers are facing considerable economic hardship and end up with more outstanding principal, less equity, depleted savings, and worse credit scores. SIGTARP also cautioned that “Treasury’s apparent belief that all failed trial modifications are successes may preclude it from seeking to make the meaningful changes necessary to provide the ‘sustainable’ mortgage relief for struggling families it first promised.’” Woodstock Institute agrees that the focus must shift from the already-dwindling number of trial modifications to permanent modifications, particularly those that write down principal for underwater homeowners.
Compared to the 10 metropolitan areas with the highest HAMP activity, Chicago is fourth in terms of percentage of all active HAMP modifications that are permanent, with permanent modifications comprising 73.7 percent of all active modifications. This is higher than the national average of 72.9 percent of all active modifications being permanent (see charts C and D below).
Within the context of continually decreasing numbers of active modifications, however, this ratio does not indicate how well metropolitan regions are performing in terms of converting trial to permanent modifications. For instance, at least 18,000 modifications in the Chicago region have been cancelled since the February peak of 51,301 active modifications. The ratio of permanent to all active trial modifications continues to increase by virtue of the decreasing number of all active modifications. Since Treasury does not currently release regional data on all modifications that have been started (including those that have been cancelled), we cannot accurately assess the Chicago region’s conversion rate.