Data released in January by the U.S. Department of the Treasury, which administers HAMP, illustrate interesting information on the characteristics of HAMP and PRA borrowers and modifications. Perhaps unsurprisingly, PRA modifications are much more effective at addressing negative equity than are standard HAMP modifications. PRA borrowers are also much more heavily indebted pre-modification than are standard HAMP borrowers. Before modification, PRA borrowers had an average loan-to-value ratio of 159 percent, which was lowered to 115 percent post-modification. Standard HAMP modifications actually resulted in a slight increase in loan-to-value ratio due to capitalization of interest and fees, going from 120 percent LTV pre-modification to 122 percent afterwards. Illinois has the third-highest number of PRA modifications (six percent of all PRA modifications), following California (31 percent) and Florida (12 percent).
How often do servicers write down principal on HAMP modifications versus non-HAMP modifications? A report from the Office of the Comptroller of the Currency (OCC) says that servicers used principal reductions in 8.5 percent of non-HAMP modifications and 15.6 percent of HAMP modifications made in the fourth quarter of 2011. The differences become starker, however, when examining how modifications differ by investor. No principal reductions are allowed on Fannie Mae and Freddie Mac loans, but servicers used principal reduction on one in four of the loans in their own portfolio—where they have the most skin in the game. Portfolio loans often have a higher risk profile than do loans serviced for Fannie and Freddie, so principal reduction may be a more pressing need for portfolio loans. It should not be overlooked, however, that servicers have found a substantial role for principal reduction when mitigating losses on loans where they have the most at stake.
Servicers continue to see high rates of homeowners defaulting on their modifications, also known as re-defaulting. The OCC reports that just 48 percent of modifications made from 2008 through the third quarter of 2011 were current, while 26 percent were in default and 17 percent were in the process of foreclosure or had already completed it. Research indicates that principal reduction could improve that record. One study found that underwater subprime borrowers were nearly four times less likely to re-default with principal reduction modifications than they were with modifications that do not include principal reductions. Reducing re-default rates not only maximizes the impact of public funds by making foreclosure prevention programs more effective, but it also stabilizes communities. It seems unwise for the Federal Housing Finance Authority (FHFA), the regulator of Fannie and Freddie, to take the principal reduction option off the table when the private sector has demonstrated that it can be useful in preventing foreclosure.
We continue to urge Edward DeMarco, the acting director of the FHFA, to allow Fannie and Freddie to engage in principal reductions when appropriate. Risks like moral hazard can be mitigated by requiring verification of financial hardship or including a “shared appreciation” component, where Fannie and Freddie would recoup a portion of future home value increases. Ocwen has had success with shared appreciation principal reductions and a recent Center for American Progress paper laid out how the FHFA could implement a similar program.
In other HAMP news, total HAMP modifications in the Chicago region grew from 43,531 to 44,077 from February to March 2012, an increase of 1.25 percent (see Fig. 2 and 3). This is the 11th month of month-to-month growth below 2 percent. Permanent modifications grew by 1.3 percent from 40,170 in February 2012 to 40,699 in March 2012. Growth in permanent modifications also appears to be stalling, with March being the sixth month with growth of less than 2 percent. At the same time, trial modifications stayed fairly flat from February 2012 (3,361 modifications) to March 2012 (3,378 modifications. National trends tracked closely with regional ones.