The Treasury Department called attention to trends in "redefaults" among loans modified under the Home Affordable Modification Program (HAMP) in a blog entry today.  It noted inherent risks of homeowner default given the difficult situations homeowners face when they seek assistance and that one of the policy challenges of designing a program like HAMP in a severe crisis is to give as many homeowners as possible a chance to keep their home while recognizing that not all will succeed.

One recurring theme is the strong correlation between the percentage reduction in mortgage payment and the success rate of the modification.  Also a familiar conclusion is that HAMP homeowners consistently exhibit lower delinquency and default rates than those in private industry modifications.

Federal banking regulators recently approved capital rules which treat HAMP loans as non-modified loans which qualify for a 50 percent risk-weight category (which measures the risk exposure for a bank) compared to a 100 percent risk-weight category for other loan modifications.

The Treasury Department has, over the course of the program, taken steps to keep default rates as low as possible based on program research. This research found not only a relationship between payment reduction and redefaults but also that the success of modifications decreases with the length or severity of the delinquency at the time of the modification and also the higher the rate of negative equity.

Thus Treasury has offered increased servicer incentives for servicers to::

  • modify loans in the early stages of delinquency;

  • modify and/or extinguish principal on qualified junior liens;

  • reduce principal on first liens;

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