Redefaults Continue to Plague HAMP

The Home Affordable Modification Program continues to disappoint.

As of Dec. 31, one in three struggling homeowners who received a loan modification through HAMP ultimately redefaulted on those loans, a new report has found.

Meanwhile, the program that was supposed to help some 4 million families avoid foreclosure has helped only a fraction of that amount, according to a report the special inspector general for the Troubled Asset Relief Program, Christy Romero, presented to Congress last month.

Funded through the Troubled Asset Relief Program, HAMP was created in 2009 as a way to help millions of homeowners who had fallen behind on their mortgages stay in their homes.

The high rate of redefaults raises questions about whether the loan terms borrowers received were sustainable — or even whether they should have received modifications in the first place.

Romero has long criticized the Treasury for failing to crack down on mortgage servicers who failed early in the crisis to properly process HAMP modifications. Another problem is that there is no data on whether the best borrowers — with higher credit scores or loan-to-value ratios — were cherry-picked for those programs, leaving the worst borrowers in government modifications, essentially destined to fail.

"The fact that borrowers are redefaulting at such a high rate shows that many people are still struggling and cannot afford their modified HAMP payment," Romero said in an interview Wednesday. "Homeowners got help doled out slowly, in a complicated manner and not when they needed it most."

Romero's report found that the longer borrowers remain in the HAMP program, the more likely they are to redefault. Of the homeowners who received loan modifications in 2009, 53% had redefaulted by the end of 2014, up from 46% at the end of 2013. Of the nearly 1.4 million loans modified since 2009, 31% have redefaulted, according to Romero's report.

Though it has been six years since the financial crisis, HAMP remains the centerpiece of Treasury's efforts to aid distressed homeowners. It has largely been considered a failure due, in part, to lofty claims by the Obama administration that the program would help up to 4 million homeowners avoid foreclosure.

Treasury initially committed to use $50 billion of funds from Tarp for housing support programs, but that obligation was reduced to $29.8 billion. Just $9.9 billion of those allocated funds, or 33%, have actually been spent on programs aiding borrowers, the report found.

Roughly $5.4 billion went to pay investors, $2.6 billion was paid to servicers, and $1.8 billion went to homeowners.

Mark McArdle, chief of Treasury's Homeownership Preservation Office, said that payments made to investors ultimately helped homeowners through lower interest rates or principal reductions.

He also disputed some of the watchdog's statistics that showed servicers are still unable to process a large backlog of HAMP applications.

Before the Consumer Financial Protection Bureau adopted new servicing rules in January 2014, borrowers could simply be denied for turning in an incomplete HAMP application. Now all applications are tracked based on whether they are active, incomplete or inactive for a certain period of time, he said.

"It's still a tough nut to crack to get borrowers to turn in a completed application and for servicers to process them," McArdle said.

A big concern going forward is whether current HAMP borrowers can adjust to upcoming rate resets.

The majority of HAMP borrowers got their interest rates reduced to below market, often to as low as 2%, to make their monthly payments affordable. But those lower interest rates were only supposed to last for five years. After that, the interest rates rise by 1% a year until they are back to the same interest rate the borrower had at the time of the modification.

In December, Treasury made changes to the HAMP program to provide a cushion to help those borrowers facing rate resets stay current. Treasury will provide an additional $5,000 in principal reductions to borrowers that remain current on their HAMP mods after five years.

Treasury also is offering what McArdle called "a second mod," known as Tier 2, which requires that servicers evaluate distressed borrowers for yet another modification before a foreclosure.

Treasury also increased relocation assistance to $10,000, up from $7,000, for distressed borrowers that complete a short sale or deed-in-lieu of foreclosure.

"We wanted to create a safety net for those folks facing step-ups," said McArdle, referring to the interest rate resets.

Banks still have a massive backlog of nearly $58 billion in residential loans in the process of foreclosure, according to Federal Deposit Insurance Corp. filings compiled by BankRegData.com. That represents 48% of all nonperforming loans, and many of those are sitting in limbo often with the borrower not paying until the servicer takes action.