There has been plenty of news coverage about the short comings of the government’s mortgage modification program, but a recent report has found that the Home Affordable Modification Program (HAMP) is actually doing better than private bank modification efforts, by a ratio of 2-to-1.
According to the report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision (as documented on the CNN website), only about 11 percent of mortgages modified by the HAMP plan during the fourth quarter of 2009 have been delinquent again for two months, while more than 22 percent of private lender modification participants during that same time period have fallen behind by two months.
What’s going on? It all boils down to the size of the monthly payment reduction. The report showed that HAMP modifications reduced a borrower’s payment by an average of $608 while private mods lonely lowered it by an average of $307. Apparently if you double the size of the reduction, you cut your re-default rates in half. Perhaps one reason that HAMP is lowering the payments so much more dramatically is that the loan servicers are receiving financial incentives from the government to get these loans turned around again.
The re-default skew could become important in the coming months or year if private bank program participants keep getting behind in larger numbers. Currently private lenders are making loan modifications at twice the rate of the government. And when homeowners drop out of the government modification program, 44.5 percent of them turn to banks for another modification.
Industry observers and consumer advocates are closely watching the redefault rates on mortgage modifications. Some experts say that the adjustments are only a temporary fix and artificially depress foreclosure figures. If many people re-default and wind up in foreclosure, home prices could plummet again.
Yikes! Will we ever be done with this housing market turmoil?