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Gloomy Outlook For Loan Modifications

The Obama administration’s Home Affordable Modification Program (HAMP) is too focused on subprime loans to head off a projected 10 million to 12 million foreclosure starts that lie ahead if unemployment remains elevated, according to a report by a Congressional Oversight Panel.

The panel, created in conjunction with the Troubled Asset Relief Program (TARP) to keep tabs on financial markets and the regulatory system, said that even if the HAMP program meets a goal of facilitating up to 4 million loan modifications, its scope is too narrow to address foreclosures caused by unemployment.

“The foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market,” the report said. “It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now.”

The report recommended that the U.S. Treasury Department find ways to provide foreclosure mitigation for the unemployed and borrowers with pay-option adjustable-rate mortgage (ARM) and interest-only loans before emerging problems “reach crisis proportions.”

The HAMP program should also provide better information to borrowers on eligibility and denials, and institute a more uniform and streamlined process for modifications, the report said.

Senior Obama administration officials met with mortgage servicers this week to discuss how they can improve their efficiency and responsiveness to borrowers seeking loan modifications, even as servicers beat the administration’s goal of achieving 500,000 HAMP trial loan modifications by Nov. 1.

In announcing that the first major HAMP milestone had been reached Thursday, the Treasury Department acknowledged “more can and should be done to assist struggling homeowners and to stabilize the housing market.”

The Treasury Department currently estimates it will spend $42.5 billion of the $50 billion in TARP funding allocated for the HAMP program, which will support about 2 million to 2.6 million modifications, the oversight panel said in its report.

The report cited three fundamental weaknesses in the HAMP program.

First, the program is too narrow in scope, the report said. Not only was the program not designed to address foreclosures caused by unemployment, but many borrowers with payment-option ARM and interest-only loans don’t meet the program’s eligibility requirements.

The second problem is scale. Although the report was prepared before the Treasury Department released HAMP figures for September, even the Treasury’s goal of making 25,000 to 30,000 loan modifications per week will prevent less than half of expected foreclosures, the report said.

The third problem with the HAMP program is permanence, the report said. Many homeowners who receive HAMP modifications may eventually end up in foreclosure anyway, because they end up with more negative equity or payments that increase after five years. The report estimated that one-third of the nation’s 51.6 million homeowners with mortgages are underwater.

Nearly two-thirds of borrowers who have received loan modifications that did not reduce their monthly payments end up redefaulting within nine months, according to a recent report by the U.S. Office of the Comptroller of the Currency and the Office of Thrift Supervision.

By contrast, nearly two-thirds of borrowers who received loan modifications that reduced their payments by 10 to 20 percent were still making payments after nine months, and nearly 70 percent of borrowers who saw their payments reduced by 20 percent or more were still current, that report said.

More than three out of four loan modifications made by lenders during the second quarter reduced borrowers’ monthly payments, up from 54 percent in the first three months of the year, bank regulators said.

Several members of the Congressional Oversight Panel provided their own views on the report.

Panelist Richard Neiman, New York’s Superintendent of Banks, said he agreed with the report’s central themes and recommendations, but added that it’s “too early to judge the program or imply it will not succeed.”

HAMP modifications have resulted in a mean interest-rate reduction of 4.65 percent, from approximately 7.58 percent to approximately 2.93 percent, he said. Borrowers are seeing mean monthly savings of $740 per loan, reducing payments from on average from $1,890 to $1,150 — a 39 percent payment decline.

As HAMP gains momentum, “savings to homeowners and investors and the benefits to society should be enormous,” Neiman said in a statement published along with the report.

“We should give the program time to work and revisit HAMP within six months when a better track record and better service quality and performance results are available,” Neiman said.

The Mortgage Bankers Association said Thursday that reaching the 500,000 HAMP trial modifications milestone “shows the industry is working hard to help borrowers who want to stay in their home and have the means to pay their mortgage keep their homes.”

In addition to the 500,000 trial modifications started under the HAMP program, servicers have completed a “large volume” of modifications and other loan workouts outside of the HAMP program, the MBA said.

The HOPE NOW coalition of mortgage servicers, investors and mortgage insurers on Sept. 30 announced that participants completed 325,842 workout plans in August, a 28 percent increase from the month before. Repayment plans increased 38 percent to 239,982 while loan modifications were up 7 percent to 85,859, the group said.

Foreclosure starts fell 21 percent from July to August, to 224,262, while foreclosure sales were down 16 percent, to 75,063.

HOPE NOW loan servicers have completed 2.1 million workouts this year, and 5.27 million since the coalition was formed in the third quarter of 2007.

HOPE NOW estimates 2 million homes started the foreclosure process in the first eight months of 2009, and that there have been 5.26 million foreclosure starts since third-quarter 2007.

The group counted 601,445 foreclosure sales in the first eight months of this year and 1.84 million since the third quarter of 2007.