Why The Administration's HAMP Anti-Foreclosure Program Will Be A Failure

Tyler Durden's picture

Much hope had initially been placed in Obama's Home Affordable Modification Plan (HAMP) whose purpose was to keep millions of homeowners out of foreclosure. Yet a recent analysis by Moody's senior director Celia Chen demonstrates that out of the 3 to 4 million loans that the administration had hoped would benefit from HAMP, at most 1 million will experience a foreclosure benefit, and more realistically, this number would be a mere 400,000, less than 1% of all U.S. first mortgages.

As a reminder, HAMP eligibility is based on the following selection criteria: (1) loans must be originated prior to January 1, 2009; (2) mortgaged properties must be owner occupied; (3) outstanding loan balances must be below the expanded conforming limit; and, (4) borrowers' front-end debt-to-income ratios must be greater than 31%. In addition, HAMP requires that borrowers are either currently delinquent on their payments or otherwise deemed by servicers to be at risk of "imminent default."

In its analysis of HAMP beneficiaries, Moody's collaborated with Equifax to create a loan-level data set, which started with the approximately 55 million first mortgages identified as active as of January 31, 2009, and subsequently filtered down to 8.2 million loans that meet the preliminary eligibility criteria.

Subsequently, Moody's factored in loans which would be unable to reach the DTI target rate of 31% by reducing the rate to 2% and extending the reamortized loan term to 480 months, which made 2 million loans in the broader population of 8.2 million ineligible. Next, Moody's cut off the 2.5 million in loans which are too far underwater (CLTV > 100%) to make economic sense for modification by the lender. This is also known as the equity put option. As Moody's puts its "borrowers are constantly evaluating the put option on their mortgages. As soon as the value of the option turns positive, that is the discounted present value of the outstanding loan exceeds that of the house, then the borrower will exercise the option by walking away from the loan." This has been a tactic recently endorsed by various mainstream media sites. Lastly, Moody's eliminates a further 2 million whose default probability is too high or too low.

The result: 1.7 million loans with positie NPV that services would be willing to modify. This number is revised down by 15% for services who are not participating in HAMP per the Treasury Department. Of the resulting 1.5 million, 40% of trial modifications fail to make 3 required payments or complete the required paperwork.

And at last, of the resulting tiny 600,000, 200,000 redefault, leaving HAMP with a stunning mere 400,000 beneficiaries. So much for the billions of dollars spent to implement a program that will benefit less than 1% of all US first mortgages.

 

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sangell's picture

Then there is Assistant Treasury Secretary Michael Barr's comment "  “You have to be very careful not to design a program that would change people’s behavior across the country in a destabilizing way.” 

I presume he means no principal reduction for that would be 'destabilizing' to those who do not qualify for HAMP but sure would have an incentive to do so were principal reduced.

Anonymous's picture

This whole program seems to have been designed to keep money flowing to the banks. The homeowner (statistically speaking) will only continue to pay longer for their underwater abode and will still default eventually.
Hey. Why not stop paying now?

deadhead's picture

This is a very nice piece Tyler...thank you.

Zippyin Annapolis's picture

TD

 

None of this is new--what is amazing is that no one at the White House/ Treasury read the data and research.

 

From the Boston Federal Reserve:

 

Reducing Foreclosures
Christopher L. Foote, Kristopher S. Gerardi, Lorenz Goette, and
Paul S. Willen
Abstract:
This paper takes a skeptical look at a leading argument about what is causing the foreclosure
crisis and what should be done to stop it. We use an economic model to focus on two key
decisions: the borrower’s choice to default on the mortgage and the lender’s choice on
whether to renegotiate or “modify” the loan. The theoretical model and econometric analysis
illustrate that “unaffordable” loans, defined as those with high mortgage payments relative to
income at origination, are unlikely to be the main reason that borrowers decide to default.
Rather, the typical problem appears to be a combination of household income shocks and an
unprecedented fall in house prices. Regarding the small number of loan modifications to date,
we show, both theoretically and empirically, that the efficiency of foreclosure for investors is a
more plausible explanation for the low number of modifications than contract frictions related
to securitization agreements between servicers and investors. While investors might be
foreclosing when it would be socially efficient to modify, there is little evidence to suggest they
are acting against their own interests when they do so. An important implication of our
analysis is that policies designed to reduce foreclosures should focus on ameliorating the
immediate effects of job loss and other adverse life events, rather than modifying loans to
make them more “affordable” on a long-term basis.

 

http://www.bos.frb.org/economic/ppdp/2009/ppdp0902.pdf

pros's picture

TO: Zippyin..

that Fed article is another half-baked attempt to justify a back-door government price support for underwater TBTF assets now owned by the Fed.

 

 

Zippyin Annapolis's picture

Maybe another FRB study somewhere addresses QE and TBTF

 

--this one simply suggests that loan mod programs are just so much pissing in the wind--they do not and will not work.

rawsienna's picture

The abstract is a joke. One does not need a "theoretical model and econometric analysis" to figure out why borrowers "decide" to default.  The word "decide" is interesting.  It implies a choice. Well, for some who actually "choose" to default, it is simply because they are underwater on their investment and it is a good economic decision. THat is the problem with high LTV lending, the lender/guarantor is short a put option that is close to the money.  If borrowers were required to put down 25-30% downpayments, the exercise of this option would be rare.  

THere are those that default on their loans because they have no choice. They have lost income and can no longer afford the "rent".  They may or may not have taken out a "unaffordable loan but that hardly matters if they are not working.  These people deserve our sympathy and help but modifying their loan will likely result in another default.  Barney Frank must have coauthored the report because it essentially concludes that all the people that fall into this category should have the government pay their mortgages while they are unemployed (gee Barney, did the Banks suggest that or are you trying to kick GSE and FHA losses down the road so you can continue the reckless policies of the past). I do think the government should aid "some" at risk homeowners who lost income due to job loss or illnessbut we can not bail out every irresponsible homeowner/lender that borrowered/lent more than he/she could afford.

What is most disturbing is that the govt/fed continue to make the same mistakes. FHA continues to lend at 97% ltv despite that fact we all know that home prices can go down instead of up.  Of course unemployment and lack of income growth are contributing to the foreclosure crises but the main reason was high ltv lending and home price declines. You have high unemployment in France and yet you do not see the same kind of problems with mtg defaults there.  Too many academics making policy these days.   

Oh  .. lets not forget the hundreds of billions in home equity risk on the books of major banks that are marked at 95c on the dollar but will be worth 10-15c if HAMP was a success. 

ghostfaceinvestah's picture

The actual report was much better, here is an excerpt from an article covering it:

 

"

Under the trigger-event hypothesis of mortgage default, a borrower will still fulfill his payment obligation unless he experiences a life event resulting in a disruption of income. This event might include a medical illness or a divorce or, most often, a loss of employment or a considerable reduction in earnings. As a result of the event that makes the monthly payment unaffordable, the borrower will then consider the equity in the home and might extract equity through a home equity loan if the borrower thinks the life event is only temporary. Otherwise, the borrower may consider trading down or selling the home to pay off the existing mortgage and moving to a less expensive residence. If the borrower has little or no equity in the home, then the borrower will have no other option but to default.

According to Moody's, an alternative perspective on defaults views borrowers as constantly evaluating the put option on their mortgages. As soon as the value of the option turns positive, which means the discounted present value of the outstanding loan exceeds that of the house, then the borrower will exercise the option and walk away from the loan.

Regardless of whether the default happens because of a trigger event or as the exercising of a strategic default option, equity is the main driver of the final default decision."

http://www.structuredfinancenews.com/news/-201931-1.html?ET=structuredfi...

Anonymous's picture

relevance, success, or cost effectiveness are not part of the vocabulary of socialist totalitarian politburo apparatchik hacks....

please, what time does american idol come on?

Anonymous's picture

JANUARY 19, 2010.U.S. Aid Benefits Banks, not Homeowners

BY PETER EAVIS
Government support for the economy has helped banks make all manner of windfall profits. But have outsize returns in banks' mortgage operations deprived borrowers of lower mortgage rates?

In 2009, there was a big jump in an industry margin used to gauge the profitability of banks' main mortgage business, selling home loans to government-supported Fannie Mae and Freddie Mac.

In theory, if that margin had remained at narrower, historical levels, mortgage rates for borrowers could have been lower. That might have created sizable savings for homeowners over the life of their loans and breathed more life into the housing market.

http://tinyurl.com/yfq3xna

rawsienna's picture

Yeah .. THe FEd/Treas bought 1.5trillion in agency MBS to drive down mortgage rates and teh banks and GSE's just increased their fees.  The HARP program was supposed to take care of underwater borrowers with a gse loan to refinance (the GSE already has the credit risk so it would make sense for them to allow good borrowers who have LTV over 80 to "streamline" refi ) but for some reason the GSE raised the fee.  Bottom line, MBS QE is a massive failure due to very low levels of refi activity.

ghostfaceinvestah's picture

First of all, of course the GSEs had to charge fees for refis, they charge delivery fees for purchases, if they didn't charge for refis, every single purchase mortgage would be flipped almost immediately to lower the rate.

And do you really think refinancing underwater borrowers would have made a difference?  HARP is no different than HAMP, except HARP is for borrowers who stay current, but the effect is the same - lowering monthly payments for borrowers who are underwater for the most part.

There is no help for these borrowers, except to make short sales easier, which the government should do.  Unless you think the government should be in the business of granting principal foregiveness.

rawsienna's picture

I was referring to the additional fees (loan level pricing adjustments or LLPA) they add on to their standard g-fee and 25bp delivery fee.  They are important for purchase and equity take out loans but are a barrier to refi which did not exist prior to 2008. They do not exist in the FHA streamline refi program.  I also would not worry about borrowers refinancing for just 50 or 75 bp without any HPA.  Still need to cover a bunch of other costs. 

On the margin I do think it will make some difference in that a person who does refi into a lower rate show a desire to stay in the home. As I mentioned in an earlier post, negative equity is the single biggest risk factor for default but I do think that HARP could help prevent some "strategic" defaults.  AFter all, a borrower who is current but only marginally underwater may think that home prices may recover and therefore may not want to give up on his investment.  So yes, I do think HARP can make a difference especially for those homeowners with ltv between 90-120.  

 

 

 

 

Rainman's picture

Maybe HAMP can help the OC high end shadow market

    www.doctorhousingbubble.com

Anonymous's picture

the acronym is all wrong...it should be something like CHUMP....citizens get humped....citiens' housing underwater mortgage purifier...

Anonymous's picture

You must not just govern, in fact you don't have to govern at all, you just have to appear to be governing.

Miyagi_san's picture

citizens for strength and security...paid for by Dem. labor unions BO's best bud's. They must be sweating loosing Mass to Scott Brown after dumping a load of cash called STIMULUS on Gov. Patrick's lap.

Anonymous's picture

which gave me the idea of a campaign theme for 2012...

America, do you smell the stench wafting across
the land? does it smell like dead fish laying
for 3 days on a hot georgia sidewalk? does everyone
who walks by have that unmistakeable body odor?

then get rid of the bo! find your local polling booth
and wash the BO away! do it for your country,
do it for your family, by god to it for your dog...

Anonymous's picture

31% debt to income ratio is called being house poor for most Americans. Maybe if you make 100K a year you can afford to pay 31% towards your mortgage but not if you make 40K. Also who in CA, NV, FL, AZ, MI etc has any equity at all if had purchased in the last 5 years or so? When that plan was announced I said "What a joke. That'll help almost nobody." I was right.

I say stop paying it. Live in it for as long as possible for free then go rent for half your payment. Close your too big to fail bank account. Cancel your to big to fail bank credit cards. Bank with a local credit union. File BK if you can. Stop shopping at Walmart. Stop buying corporate food. Grow a garden. Buy from farmer's markets.

ghostfaceinvestah's picture

True, especially when you consider DTIs are measured on GROSS income.  The key is disposable, after-tax income and reserves that can be used to cover fiscal emergencies.  And reserves can include house equity (which can be tapped into, or the house can be sold, in an emergency).

If you don't have excess disposable income and/or reserves, you are fucked either way.  You are much better off stopping payment, living rent-free in your house for 18 months, and building up your reserves that way.

spekulatn's picture


The result: 1.7 million loans with positie NPV that services would be willing to modify. This number is revised down by 15% for services who are not participating in HAMP per the Treasury Department. Of the resulting 1.5 million, 40% of trial modifications fail to make 3 required payments or complete the required paperwork.

And at last, of the resulting tiny 600,000, 200,000 redefault, leaving HAMP with a stunning mere 400,000 beneficiaries. So much for the billions of dollars spent to implement a program that will benefit less than 1% of all US first mortgages.

 

Now that's progressive.

Bear_Cub's picture

Most of these federally sponsored short sale or mod programs are only for lenders that aren't government agencies. The whole package has very little incentive to it for lenders and in some cases even less for borrowers.

 

Now with Timmy taking the caps off of  Fannie and Freddie's losses, I expect to see the GSEs come out with some kind of AMAZING short sale and loan mod program (25% principal reduction, interest rates in the 2's-3's maybe?) that will provide instantaneous relief to all of the loan's owned by fannie/freddie, which is about half of them in the US, resulting in massive losses for the GSEs, huge shifts in cost onto tax payers, and very grateful voters come 2010 and 2012. Expect to see the new process in the next 2-3 months.

Rick Blaine's picture

Let me reiterate this - I am not proud of what I am doing.

I have not paid my mortgage since July of '09.  There are two reasons for this, my income was reduced by about $50K last year...and I am c. $250K under water.  No, I am not in foreclosure yet.

I purchased the house to live near my family...and in part as an investment.

I am currently negotiating with my bank (one of the TBTF).  Part of the process was them offering me a HAMP modification.

I rejected the offer for one simple reason - although it did reduce the monthly payment considerably, in the long run, I knew it just did not make sense for me to hope/assume that I would regain the $250K in lost equity in anything resembling the near future...especially when considering that I think there is a possibility that I will lose my job.

As I am still negotiating, I guess there is an EXTREMELY remote possibility that I will be offered a principal reduction, which could lead to a similar monthly payment as the HAMP offer.  Those two things combined (principal reduction and lower payments) MIGHT convince me to risk staying in the house.

However, until that happens, my plan is to get as much free rent as possible...and when I finally do get booted (after essentially "recovering" my down payment), I will rent an apartment or condo (many of which are not rejecting people with foreclosures on their credit...I've already looked into it) for c. $1000 less per month than the HAMP offer...and that is taking the tax break into account.  Thus, I will effectively be able to pocket an extra $1000 per month by moving into an apartment - of course, this is wildly assuming that the value of my home doesn't sky rocket any time soon...

The bottom line is that for all intents and purposes the only things that are going to keep me in this house are free rent and a principal reduction.

Again, nothing I'm proud of - just being honest here.

Anonymous's picture

Sorry for the unfortunate circumstances, but I say kudos!

Anonymous's picture

Thanks, RB, I think you have an increasingly common story. Good luck out there....

RockyRacoon's picture

Thank you for your honesty and the proper contrition.  I fully expect that principle reduction is baked into the GSE cake.  The unpredictable element in the equation will be the reaction of folks like me who are current on the mortgage, have a decent LV spread, and securely employed.  I think we won't take it very well.  Gotta go now -- I have a pitchfork to sharpen.

Anonymous's picture

better than the bankers Rick.. thats for sure..

Anonymous's picture

"Of the resulting 1.5 million, 40% of trial modifications fail to make 3 required payments or complete the required paperwork."

Err....does this 1.5 million include the 600k+ that have already received trial mods? Only 10% of these have gone to permanent status. Many of the rest can't produce the requisite paperwork (liar's loans) which puts the trial mod failure rate closer to 80%, not 40%

Servicers are raking in lots of fees at taxpayer expense on all these trial mods that don't have a chance of going perm...

mrmortgage's picture

The Google Charts are pointing to a very tough year economically. I learned a long time ago to watch behavior and action above all else. I do the action test when out in the real world. Full Post here..

http://thegreatloanblog.com/

 

Not Just[ Jumbo Loan](www.thegreatloan.com "Jumbo Loan") Talk Either.

Anonymous's picture

There is a simple reason why modifications (specifically the permanent mods) don't work. It has to do with the securitizations that own the loans and servicers. As stated by Anonymous above - "Of the resulting 1.5 million, 40% of trial modifications fail to make 3 required payments or complete the required paperwork." Simply, servicers want to stop the bleeding.
See www.assetback.net for more discussion on this issue.