HAMP Modifications Decline, but Lessons Learned

On both a quarterly and an annualized basis, the Home Affordable Modification Program (HAMP) is declining, to the extent that it might soon fade into irrelevance. At this point, we seem to have a firm understanding of what contributed to the program’s disappointment (failure would seem to be too strong of a word), and yet an equal understanding of the program’s benefits. In short, there is still hope that HAMP can yet prove its worth.

Media coverage of HAMP is certainly skewed towards the negative, and justifiable so. It was originally heralded that the program would help 3-4 million borrowers. Since its inception in March 2009, however, an estimated 1.7 million trial modifications have been issued, leading to only 550,000 permanent modifications. That’s a meaningful number, but represents only a blip in the foreclosure crisis, which will probably affect more than 10 million borrowers before all is said and done.

Analysts have identified a few major problems, the chief of which are that lenders are not incentivized to modify mortgages and the Treasury Department has no authority to force them to do so. As its spokesperson summarized, “These [loan servicers] are organizations that were never set up to help homeowners. They were set up to collect…From Treasury’s perspective, we are only given the authority to run a voluntary program. A mandatory program would require an act from congress.” In other words, most of the impetus for loan modifications has to come from the lenders, themselves.

In practice, notwithstanding the period shaming from the Treasury Department, there is very little motivation to do so. Anecdotal reports paint pictures of lenders (deliberately?) giving borrowers the run-around. They require multiple submissions of the same document in order to try to catch mistakes and justify refusal. They approve borrowers for loan modifications only to reject them later, or in a few extreme cases, have foreclosed on homes with pending applications for modification, despite the fact that this is against the law. Borrowers that manage to successfully navigate the process are rewarded with private loan modifications that are far less than what they applied for and still less than what they would have received under a comparable HAMP modification.

The lessons that borrowers are taking away from this process are few but substantial. First of all, engage the services of a HUD Approved Housing Counseling Agency. According to a study published by the Urban Institute, “found that 36% of those homeowners [that received counseling] fell back into foreclosure or serious delinquency (defined as missing at least three months of payments) within eight months of getting help,” compared to the “49% of…borrowers studied who received loan assistance but no counseling.” That’s probably because counseled borrowers saved 5 per month on their mortgage payments, compared to 8 saved by non-counseled borrowers. Those that sought the assistance of counseling agencies were also twice as likely to receive modifications.

Additionally, make sure that you keep meticulous records of your correspondence with your lender/servicer related to HAMP. Finally, do not stop making mortgage payments solely in order to increase your chances of receiving a loan modification. Even if this dubious piece of advice is true, you might end up doing more harm than good. As one adviser warned, “Borrowers need to know that when you start missing payments, the foreclosure process starts and once it gets going, it’s very hard to stop.”