But Laurie Goodman over at Amherst Securities brings up another point.
The programme actually has a lower success rate than other modification programmes — even those that involve a similar amount of payment reduction.
By Goodman’s calculations, the original Hamp programme has a ‘success rate’ of about 32 per cent — that is, about a third of the trial mortgage mods begun will be successfully converted to permanent ones, and won’t redefault.
The above shows redefault rates of proprietary mortgage mods (i.e. non-Hamp) from the start of 2007 to now, and sorted by degree of payment reduction. After 18 months these have a success rate of between 30 and 60 per cent. The most relevant, the 31-40 per cent bracket, stands at 40 per cent.
As Goodman puts it:
While the HAMP program will show a relatively low re-default rate, the real success rate (32% or so) will be lower than what was historically experienced for modifications with a similar payment reduction. Why slightly lower? HAMP considers only front-end [Debt to Income] DTI (1st mortgage payment + taxes + insurance). Most servicers in their proprietary modification programs have attempted to work with borrowers to reduce their back-end DTI (1st + 2nd mortgage, taxes, insurance, credit card payments, auto loans, etc). Others have declined to modify borrowers where backend DTI is an impossible obstacle. HAMP does not use back-end DTI as an input; HAMP encourages borrower’s who have back-end DTIs >55% to seek credit counseling, but it is not clear this is enforced. We know that of the HAMP modifications that have become permanent, the borrower’s back-end DTI went from 80% before the modification to 65% afterwards (a still unsustainable level!).
The implication being that while Hamp has helped stabilise house prices in recent months, it’s done so by building up shadow inventory and delaying additional defaults. In other words, once its initial impact starts to fade, we may well be looking at a summer (and autumn) of double-dip house prices.
But never fear — this is only Hamp 1.0 we’re talking about.
Since the original was announced in March 2009, the US Treasury and the housing cohorts have been tweaking the programme, and setting up addendums.
Hamp 2.0, if you like, includes things like a principal reduction scheme — which was something lacking in the original programme.
But even these, Goodman says won’t be enough to derail the double-dip:
Unfortunately, we fear that the enhancements announced in March , when fully implemented, will be less successful than hoped. In particular, we are concerned that:
- • The FHA short refi program is clearly intended as a “take-out” for modified loans. We believe few will qualify due to the back-end DTI constraint. Moreover, for loans in private label securitizations, we don’t think that servicers will have the incentive to go the FHA short refi route, unless it helps the value of the 2nd lien. And this program leaves room for the 2nd lien investor to game the 1st.
- • The Principal Reduction Alternative, a voluntary program, will not receive the servicer support it deserves. A number of servicers have said they will not adopt it unless Fannie and Freddie adopt it. We don’t think the GSEs will, as it is inconsistent with the concept of conservatorship.
- • The 2nd Lien Modification Program has been adopted by the largest 2nd lien servicers/investors. However, the modification will be less effective than it could be, as it occurs after the 1st lien modification, not simultaneously, and needs borrower consent.
The implications for non-agency MBS investors: We do not expect considerable write-offs in the near term as a result of principal forgiveness. We anticipate both the FHA short refi program and the principal reduction alternative will gain limited traction.
The implications for the housing market: If the modification programs do not succeed, the huge amount of shadow inventory will produce an inevitable double dip in home prices. Our concern is that the programs announced so far will be less successful than hoped, and home prices will begin to fall. At some point, the Administration is going to have to make the principal reduction alternative more mandatory, and find a way to make the first and second lien modifications simultaneous.
Thou shalt modify mortgages — or else.
Amherst: ‘Relatively few’ loans will qualify for FHA Short Refi Program – HousingWire
The slow death of Hamp, the summer of delinquencies – FT Alphaville
US Housing Bubble v2.0, charted – FT Alphaville