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Treasury Blog Examines Redefault Rates for HAMP Modifications

by devteam July 23rd, 2013 | Share

The Treasury Department called attention to trends in “redefaults” among loans modified under the Home Affordable Modification Programrn(HAMP) in a blog entry today.  It noted inherent risks ofrnhomeowner default given the difficult situations homeowners face whenrnthey seek assistance and that one of the policy challenges of designing arnprogram like HAMP in a severe crisis is to give as many homeowners asrnpossible a chance to keep their home while recognizing that not allrnwill succeed. </p

One recurring theme is the strong correlation between the percentage reductionrnin mortgage payment and the success rate of the modification.  Also a familiar conclusion is thatrnHAMP homeowners consistently exhibit lower delinquency and defaultrnrates than those in private industry modifications.</p

Federal bankingrnregulators recently approved capital rules which treat HAMP loans asrnnon-modified loans which qualify for a 50 percent risk-weightrncategory (which measures the risk exposure for a bank) compared to arn100 percent risk-weight category for other loan modifications.rn</p

ThernTreasury Department has, over the course of the program, taken stepsrnto keep default rates as low as possible based on program research. This research found not only a relationship between payment reductionrnand redefaults but also that the success of modifications decreasesrnwith the length or severity of the delinquency at the time of thernmodification and also the higher the rate of negative equity.</p

ThusrnTreasury has offered increased servicer incentives for servicers to::</p<ul<li

modifyrnloans in the early stages of delinquency;</p</li<li

modifyrnand/or extinguish principal on qualified junior liens;</p</li<li

reducernprincipal on first liens;</p</li</ul

Treasury notes the majority of homeowners who were unable to keep up withrntheir modified payments under HAMP have still avoided foreclosure. Approximately nine percent have reinstated or paid off the loan; 36rnpercent have received an alternative modification or payment plan,rnand 12 percent have completed a short sale or a deed-in-lieu ofrnforeclosure. HAMP requires its servicer to reach out to homeownersrnwho fall behind on modifications to review other assistance optionsrnbefore starting foreclosure. Hernsaid that Treasury will continue to examine whether there are otherrnsteps that can reduce the risk of defaults such as increasedrnrequirements for financial counseling.

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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