Government Loan Modification Program Struggles

Here we go again…the government’s HAMP program (Home Affordable Modification Program) was recently re-evaluated by the Congressional Oversight Panel.  And big surprise…it’s not working.  In fact, it’s been a miserable failure so far.  A year and a half since the program started, HAMP is on pace to prevent only 700,000 to 800,000 foreclosures.  By the end of October, only 519,648 permanent loan modifications had been made.

According to Les Christie at CNN, there are several reasons for the less-than-projected results.

First, servicers, the companies hired by banks to service loans, earn fees imposed during foreclosure. Because of that, servicers have little incentive to help facilitate loan modifications.

Second, loans may be burdened with second mortgages, often home equity lines of credit.  These junior lienholders have to approve the loan mod.

“I think the program has turned out to be a lot smaller and have a lot less impact than we thought it would.”  -Ted Kaufman, former U.S. senator (DE) and current chairman of the Congressional Oversight Panel.

The good news is that the estimated price tag of $30 billion for HAMP may end up only being about $4 billion.  But tell that to the homeowners who need the program’s assistance and can’t qualify.  According to the CNN article,

“Absent a dramatic and unexpected increase in HAMP enrollment, many billions of dollars set aside for foreclosure mitigation may well be left unused. As a result, an untold number of borrowers may go without help — all because Treasury failed to acknowledge HAMP’s shortcomings in time.”

So what about the loans that actually were modified?  The story isn’t much better, as many re-default.  Within a year of a loan modification being implemented, 21% of loans are 90 or more days delinquent.  According to the report, that number is projected to reach 40% within 5 years.  My guess is that 40% is a conservative estimate…it assumes that the number of loans to default in a 4-year period (years 2-5) will be slightly less than the number that went into default in year 1 alone.

Read the whole report here.

For sellers, loan modifications are an option, and it’s possible that your lender may work with you.  Remember that not all loan mods are part of HAMP.  Your lender can offer you a different loan mod option.  The key is to consult an attorney before agreeing to anything.

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