Treasury Notes

 Understanding HAMP Re-Default Rates

By: Mark McArdle

​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 assistance. 

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 for homeowners.

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.

Studies 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 period.” 

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 topic. 

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 successful modification.

·      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.  

HAMP Conditional 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 struggling homeowners.

Cumulative Re-Default 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.

Cumulative Re-Default Rate by Delinquency at Trial Start

Credit Score

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. 

Cumulative Re-Default Rate by Credit Score at the Time of Modification

Giving Homeowners Another Opportunity to Avoid Foreclosure

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.

Based 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 foreclosure.


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.



Posted in:  Home Affordable Modification Program
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