The Home Affordable Modification Program (or HAMP) has been
a critical part of the Obama Administration’s efforts to provide relief to
families at risk of foreclosure and help the housing market recover from a
historic crisis. Since its launch in
2009, HAMP has directly helped more than 1.2 million homeowners successfully
modify the terms of their mortgages to reduce their monthly payments, and
indirectly helped millions more by creating new standards for mortgage
Recently there has been attention on those homeowners who
receive assistance through HAMP but default on their modified payments (called
re-defaults). It must be remembered that
mortgage modification programs include an inherent risk of homeowner default,
given the difficult situations homeowners face when they seek assistance (like job
loss). One of the policy challenges of
designing a program like HAMP, particularly given the severity of the recent
housing crisis, is giving as many struggling homeowners as possible the chance
to keep their home while recognizing that not all will succeed.
We have tried to strike the proper balance in the design of HAMP,
and we have taken additional actions since the beginning of the program to improve
our ability to achieve this goal. For
example, HAMP established eligibility rules so that assistance would go to
those homeowners most in need. HAMP also
established protocols so that the modifications provided would be sustainable
Since 2010, we have published detailed data highlighting the
delinquency and re-default rates under the program. Every quarter we publish
re-default rates by modification vintage (the age of the modification) and
payment reduction percentage. This data
shows that the performance of HAMP modifications has improved over time and is
strongly correlated with the amount of payment reduction.
- For modifications in
effect for one year, 20.5 percent of modifications started in the third
quarter of 2009 have disqualified, compared to only 10.7 percent for
modifications started in the first quarter of 2012.
- For modifications in
effect for two years, only 16.5 percent of modifications with a monthly
payment reduction greater than 50 percent have re-defaulted, compared to a
disqualification rate of 42.6 percent where the payment has been cut by 20
percent or less.
by the Office of the Comptroller of the Currency (OCC) have found that
homeowners in HAMP consistently exhibit lower delinquency and re-default rates
than those in private industry modifications.
The OCC has found that HAMP’s lower re-default rates “reflect HAMP’s
emphasis on the affordability of monthly payments relative to the borrower’s
income, verification of income, and completion of a successful trial-payment
Similarly, the Federal banking regulators
recently approved capital rules which treat HAMP loans as non-modified loans. Regulators considered this treatment to be
appropriate in light of the special and unique incentive features of HAMP and
the fact that the program is offered by the U.S. government to achieve
sustainable loan modifications. Under
these rules, loans modified under HAMP qualify for the 50 percent risk-weight
category (which measures the risk exposure for a bank). This is compared to a 100 percent risk-weight
category for other loan modifications.
Treasury recently outlined some of the steps taken to keep
re-default rates as low as possible in a letter
to the Special Inspector General for the Troubled Asset Relief Program on this
Since the beginning of the program, we have conducted
research on re-defaults. The data and
analysis we have conducted show that high re-default rates are associated with
lower payment reductions, the severity (or length) of the delinquency at the
time that the trial modification is started and higher rates of negative equity.
Accordingly, we have made the following changes, among
others, since the program began:
Increasing the upfront servicer incentive to
encourage servicers to modify loans in the early stages of delinquency, since
research shows that reaching borrowers earlier is likely to result in a more
Offering incentives for participating servicers
to modify and extinguish principal on second liens through the Second Lien
Modification Program (2MP) if the first lien is in a permanent HAMP
modification. This reduces a homeowner’s
overall monthly housing payment to a more sustainable level.
Increasing the incentives for principal
reduction on first and second liens, since research shows that modifications
with greater payment reductions and lower loan-to-value (LTV) ratios (the
difference between the unpaid principal balance of the mortgage and the current
value of the home) tend to have lower re-default rates.
As the chart below shows,
program data supports that the longer homeowners remain in HAMP, the more
likely they are to keep up with their mortgage payments and avoid foreclosure.
Re-default Rates Over Time
The single greatest contributor to a homeowner’s success in
maintaining their modified payments is payment reduction. Simply put, the greater the payment reduction,
the more likely a struggling homeowner will be to afford those payments over
time. This is why, from the start, the
focus of HAMP has been on affordability – evaluating a struggling homeowner’s
ability to pay relative to income and financial hardship. This was not a widely applied concept in
mortgage servicing when HAMP was first launched, but one that has now been
adopted more broadly as an important standard for providing relief to
Rate by Reduction in Monthly Mortgage Payment
Homeowners in HAMP receive some of the most meaningful payment
relief available, which increases the likelihood of their long-term success at
avoiding foreclosure. Homeowners in HAMP
today have a median savings of $547 every month – a 39 percent reduction from
their previous payment. As outlined
above, one of the changes we have made to the program is to increase incentives
for principal reduction since research shows that modifications with greater
payment reductions and lower LTV ratios tend to have lower re-default rates.
Reaching Homeowners Before They Fall Too Far Behind
Our research has also shown the importance of reaching
homeowners early. As the chart below
shows, the further behind homeowners have fallen on their mortgage payments
when they receive help, the less likely they are to keep up with their mortgage
modification. This is why we made
important policy changes to HAMP to get relief to homeowners early on,
including changing the incentive structure to encourage servicers to modify
loans early in the delinquency.
This is also an important reason why we encourage homeowners
to reach out for help at the first signs of trouble. In a partnership
with NeighborWorks® America, Treasury is working with more than 700 organizations
across the country to reach struggling homeowners to help them apply for assistance. To date, Treasury has also hosted 86 homeowner
outreach events around the country, which have encouraged about 75,000
homeowners to reach out for face-to-face assistance.
Rate by Delinquency at Trial Start
Another important indicator of the likelihood of re-default is
a homeowner’s credit score when he or she receives help. As the chart below illustrates, the lower a
homeowner’s credit score, the less likely he or she is to maintain a
modification for the long term. For most
homeowners, this is likely a result of being delinquent on their mortgage
payments when they apply for assistance.
This is an example of balancing the need to minimize re-defaults while
helping those individuals who need help the most.
Rate by Credit Score at the Time of Modification
Giving Homeowners Another Opportunity to Avoid
Of those homeowners who have not been able to keep up with
their modified payments under HAMP, the
majority have received other forms of assistance or reinstated or paid off
their mortgage loans. HAMP requires
servicers to reach out to any homeowner who falls behind on a modification to review
all other assistance options, before the servicer starts foreclosure
proceedings. This is an important
protection for homeowners who face an unexpected change in their financial
circumstances – such as unemployment or illness – that makes it difficult to
keep up with their HAMP payments. This
gives these homeowners another opportunity to get help and avoid foreclosure.
on the most recent data reported by the largest servicers, only a small
percentage of borrowers who have re-defaulted in HAMP appear to go into
foreclosure. Approximately nine percent have
reinstated or paid off the modified loan.
An additional 36 percent have received an alternative modification or
payment plan, and 12 percent have received a short sale or deed-in-lieu of
foreclosure. This data suggests that,
even if a HAMP modification loses good standing, the program has helped many
families temporarily who are then able to achieve another solution to avoid
Treasury will continue to examine whether other steps can
help reduce the risk of re-defaults. For
example, HAMP currently requires borrowers to obtain counseling if their total
(housing and non-housing) debt-to-income ratio exceeds 55 percent. In addition, we are looking at whether
financial counseling for borrowers at the beginning of a modification can be
effective in reducing re-default risk.
While re-default remains an unfortunate outcome for some
borrowers, clearly without HAMP, national foreclosures rates would have been
much higher and many borrowers would not have received the assistance they
needed. HAMP continues to be the
strongest available program for mortgage modifications. Receiving assistance through HAMP gives
homeowners a valuable opportunity to strengthen their financial footing and
stay in their homes.
We continue to learn from the housing crisis. While the broader housing market is now on
the path to recovery, many homeowners are still feeling impacts from the crisis. We will continue to try to reduce the re-default
risk while still helping those who need help.
This is a positive outcome for these homeowners, their families, their
communities and our economy.
Mark McArdle is the Acting Chief of Homeownership
Preservation at the U.S. Department of the Treasury.