New HAMP data show that active trial modifications dropped nationally by 59 percent from July 2010 to July 2011, while permanent modifications grew by 60 percent over the same period (see Figure A). The change in trial modification activity is likely influenced by a series of changes HAMP underwent in 2010. Before January 31, 2010, Treasury required servicers to review all trial modifications for their eligibility for a permanent modification. Servicers were largely unable to cancel any trial modifications before January 31 or 30 days after borrowers were notified of the results of the review (whichever was later), which resulted in an elevated number of active trial modifications. After the end of the review period, trial modifications dropped by 44 percent nationally from February to May, a decline from 835,194 to 467,672. In June 2010, Treasury required servicers to collect income documentation before approving a trial modification; up until that point, income did not have to be fully documented until the application for a permanent modification. Trial modifications continued to drop as servicers updated their processes to allow for up-front income documentation, which screened out income-ineligible borrowers before they received a trial modification. Levels of active trial modifications largely stabilized after the summer of 2010.
Similar trends were observed in the Chicago Metropolitan Statistical Area (MSA), where active trial modifications dropped by 58 percent from July 2010 to July 2011, while permanent modifications grew by 60 percent over the same period (see Figure B). After the January 2010 review period ended, the Chicago region saw trial modifications drop from 43,215 to 23,640 from February to May 2010, a decline of 45 percent.
The switch to requiring full, up-front income documentation likely affected levels of permanent modifications, too. Nationally, more trial modifications converted to permanent after the June 2010 change than they did before the change. Of trial modifications that started before June 2010, 42 percent have become permanent today, while 75 percent of trials started in or after June 2010 became permanent. While there are no local data on conversion rates, local trends in HAMP activity closely mirror national trends, so conversion rates likely experienced a significant bump in the Chicago MSA as well.
While the growth in permanent modifications is positive since it shows that more people are being helped by HAMP, it does not necessarily show that the program is adequately meeting the needs of distressed homeowners. For one, growth is to be expected in a new program as it is ramped up. Secondly, there are still large numbers of distressed homeowners who are not being helped. While there are no local data on the demand for HAMP, national numbers indicate that there are a substantial number of delinquent loans eligible for HAMP that are not being served by the program. Treasury estimates that there are more than 2.5 million loans in the U.S. that are eligible for HAMP, but there are only 781,525 active HAMP modifications—30 percent of the pool of estimated eligible loans. Given the similarity between national and local trends, it is likely that the Chicago MSA is experiencing a similar level of unmet demand.
Many homeowners who need help avoiding foreclosure are unemployed or owe more than their homes are worth. HAMP focuses on making monthly payments more affordable, which wouldn’t necessarily help someone with upside-down home values or a substantial loss of income. Widespread principal reductions are needed, as well as assistance for unemployed homeowners. In addressing improper servicing practices, the Obama Administration should develop and implement solutions that will stabilize communities and effectively address the current drivers of foreclosure.