Loan Modifications – Illusion, Delusion & Confusion

After reading news articles and talking with Realtors and distressed borrowers, it has become more and more apparent that the federal government’s HAMP modification program is not working. Despite the administration’s “glass-half-full” pronouncements, the statistics tell the true story – an increasing number of distressed homeowners have concluded that their lenders’ offers of modification  simply aren’t worth it.

A recent article appearing in 24/7 discusses HAMP’s dismal statistics:

The $75 billion Making Home Affordable Program has not led to many permanent mortgage modifications.  Through May, the number was only 340,459. The figure is particularly pathetic compared to the number of borrowers who are eligible for mortgage changes–1,675,238. Total trials started under HAMP are 1,244,184.

All permanently modified mortgages involved an interest rate deduction. Fifty-four percent received term extensions. Twenty-eight percent received principal forbearance.

There is a certain irony in all of this.  During the credit boom, lenders cared little about their borrowers’ ability to repay.  In many instances they sought little or no credit history from their borrowers.  To many lenders and mortgage brokers, “A thin file was a good file.”   Today, in order to qualify a borrower for a modification of that same loan, lenders are now imposing the strict credit criteria they should have imposed initially. So is it any surprise that the folks who were not qualified in the first place, aren’t qualified today? In commenting on HAMP’s underwhelming July 2010 statistics, the astute business blog Calculated Risk, noted the following:

Think about that for a second: for the median borrower, about 80% of the borrower’s income went to servicing debt. And the median is 63.5% after the modification.

These borrowers are still up to their eyeballs in debt after the modification.


  • Another large number of trial programs were cancelled. This will mean more foreclosures (or short sales) in the near future.
  • A large number of borrowers are still in modification limbo, so there will probably be more cancellations coming.
  • The program is winding down quickly.
  • The borrowers DTI characteristics are poor – suggesting a high redefault rate over the next year or two.
  • From my perspective, however, there are several additional reasons for HAMP’s lack of success:

    • After watching housing prices cliff dive for the past few years, borrowers are becoming disenchanted with the American Dream of home ownership.  They have concluded that the modification process isn’t worth the anguish and effort.
    • As their home values continue to fall, many distressed owners have concluded that their negative equity is too great; there is simply nothing left to save through modification.
    • Much of the blame lies squarely with the lenders themselves.  Whether it’s incompetence or design, anecdotal reports of “lost paperwork” are simply too numerous to ignore.  The modification process has taken on the appearance of a diabolical shell game, causing homeowner’s to give up out of anger and frustration.
    • Rather than realistically promote HAMP for what it could do, the government oversold it as a magic pill that would “save” millions from foreclosure.  However, in medical terms, the pill was merely palliative – like ibuprofen – rather than curative – like penicillin.  In short, the government over-promised and under-delivered to thousands of people who thought modification was the answer.  Disillusion was inevitable.
    • The single-most effective tool in the loan modification arsenal – reduction of principal – was rarely, if ever, offered.  Instead, lenders simply proposed to adjust interest rates that made modest reductions in monthly installments, but added the deferred payments to the back end of  loan – turning them into the reviled negatively amortizing loans.  This doomed process of “extend and pretend” was so obvious that borrowers soon realized it would not provide any long term relief.   Their homes would still be worth 30% – 50% less than what they paid, and they would still have negative equity.

    One must wonder, in hindsight, whether the better approach might have been to simply permit the process to work itself out.  Tear the Band Aid off all at once, rather than slowly and painfully over several months – and in some cases a year or more. While some form of safety net was essential for those at greatest risk and need, it is becoming clear that in many instances, HAMP may have caused more harm than good.  Why?  Because distressed homeowners were led to believe the modification process would provide a quick and painless cure, when it could not.  For a large percentage of failed applicants, HAMP simply prolonged the pain.  And the government’s claim that it was fighting to preserve neighborhoods from mass foreclosures was either political spin or short-sighted optimism.  The actual result has been that neighborhoods are still experiencing the pain of foreclosure, but for a protracted period of time.   Many homeowners are only now coming out of unsuccessful modifications, and must confront the very same foreclosure and pre-foreclosure choices they might have addressed a year earlier.

    If one must suffer the credit consequences of a foreclosure – not to mention the uncertainty of not knowing where they will be living in a few months, would it not have been better to have dealt with it a year or more ago – rather than have spent this time supplying (and re-supplying) a lender with volumes of paperwork, only to now realize that the initial goal was either unattainable, unrealistic, or economically unwise?