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

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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