Mortgage modification plans.
The administration’s Home Affordable Modification Program (HAMP), one
of the initiatives under the MHA program, has started roughly 120,000 trial modifications per month sinceJune. These last three months, after which the homeowner generally transitions to a long-termmodification, or moves into the foreclosure process. These efforts follow more than a year of private-sector modification initiatives, which have generally provided less generous relief to borrowers
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oftenthese were simply repayment plans, in which a borrower was put on track to repay past due amounts butdid not receive a concession on the monthly payment. Importantly, the brunt of the federal modificationeffort did not start until shortly after the GSE and bank-led moratoria expired.
New data released today by the Office of the Comptroller of the Currency shows that a greater number ofmodifications include an extension of the loan term (46%) or a rate reduction (70%) than did previously.Principal reduction is still uncommon, however; it was used in only 10% of modifications in the secondquarter, and it was used almost exclusively to modify loans held in portfolio (30% of portfolio loanmodifications involved principal reductions).
Greater use of significant rate reductions and principalreductions should result in greater success in modifying mortgages; since the OCC began tracking post-modification default in Q12008, over half of modified loans have defaulted again within a year (with regard
to principal reductions, see Jan Hatzius and Michael A. Marschoun, “Home Prices and Credit Losses:Projections and Policy Options,”
Global Economics Paper 177
, January 13, 2009). Not surprisingly, banksthat modify loans held in their portfolios have tended to have better success rates than those modified byservicers, whether they are government-guaranteed or private-label mortgages.
Additional forthcoming policies.
A number of initiatives have either been announced or look at leastpossible in the near future that could reduce the number of foreclosed properties coming onto the market:
1. Legislative and judicial changes in the states.
States are apt to make additional changes like theones noted above, with the effect of lengthening the foreclosure process. In addition, courts in some jurisdictions have begun to block foreclosure actions due to inadequate evidence of claim to the property,most notably involving the Mortgage Electronic Registration Service (MERS), which is a widely usedregistry covering roughly 60 million mortgages. It is difficult to know how widespread of a hurdle toforeclosure this could become, but if it has at least the potential to significantly
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albeit temporarily
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slowforeclosure initiations.
2. Additional action from the Obama administration.
The administration will reportedly announce twoadditional actions to aid borrowers: (1) the first is to purchase up to $35 billion in municipal debt issued bystate Housing Finance Agencies (HFAs). This would be accomplished mostly through Fannie Mae andFreddie Mac, which would purchase HFA-issued debt and resell it to the Treasury (the Treasury isauthorized to buy securities from the GSEs in unlimited quantities through the end of 2009 as part of last
year’s legislation to backstop
Fannie and Freddie). An additional liquidity program would be establishedfor HFA-issued variable rate obligations. HFAs typically serve first-time homebuyers but also play aforeclosure prevention role.
(2) The Treasury and Housing Departments are likely to announce details ofa program to facilitate short sales and deed-in-lieu transactions, which would address borrowers who donot qualify for the HAMP program due to significant negative equity or other issues.
This would probablynot substantially reduce the number of properties coming onto market and would probably accelerate thetimeline for these properties to come up for sale. The benefit of such a program would be to reduce
transaction costs and to preserve a greater amount of the property’s value
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3. A few long shots.
Two issues that continue to come up in the debate over how to reduce the number
of foreclosures are: (1) bankruptcy “cram
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down” legislation, which would allow a court to modify a primary
residence mortgage to reduce the balance to the value of the property, and (2) more significant resourcesflowing into the HAMP program, possibly to reduce negative equity or make more substantial monthlypayment reductions, particularly for those who have lost their jobs.
Bankruptcy reform seems likely tocontinue to cast a shadow on the housing debate through next year, but the odds of enactment seemlow.
HAMP changes are clearly possible
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assuming that the administration extends TARP until October2009, additional resources will be available for the program until then
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but the administration appearsunlikely to take such aggressive steps given concerns about the moral hazard such programs would
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