A minor oversight in the design of the Home Affordable Modification Program (HAMP) has become a huge issue for what could be thousands of homeowners trying to get approval for participation in the program. Ironically, the flaw in the design makes struggling homeowners look too good for admission into the program by making it appear that their mortgages are indeed affordable. By basing approval on a simple ratio of the borrower’s mortgage payment to their income without including other debts like credit cards the guidelines for the program are excluding many homeowners deeply in need of loan modifications.
The way the formula is set up currently, if the borrower’s mortgage takes up more than 31% of take home pay the mortgage is considered to be too much of a burden and the borrower is welcomed in to the program. If the borrowers’ ratio is under 31%, regardless of the amount of additional debt, they must look elsewhere for a loan modification. Mortgage servicers, who have been taken to task for not modifying enough loans under HAMP’s guidelines, are now criticizing the program’s formula as being too narrow and not taking a homeowner’s full financial picture into consideration.
According to William Erbey, chief executive of Ocwen, the second-largest U.S. subprime mortgage servicer, says his borrowers are often carrying credit card bills and auto loans which take priority over paying the mortgage. “It’s not their mortgage that is out of whack. It’s that their other consumption patterns are out of whack,” Erbey says. Low mortgage payment to income ratios is the main reason for an Ocwen borrower to be rejected from the HAMP loan modification program.
Like Ocwen, CitiMortgage, which services one in 10 mortgages in the U.S., says the formula is also the leading reason it has excluded borrowers from the program. Chief Executive Sanjiv Das has been vocal about policymakers ignoring the big picture as to why many borrowers are falling behind. “This is people solving for a housing crisis not realizing we’re in a credit crisis,” he says.
Five months after HAMP was launched, the government summoned loan servicers to Washington D.C. to prod them into doing more modifications. Six months into the program the Treasury reported that only 235,000 borrowers had been enrolled while 1.5 million homeowners received foreclosure filings in the first half of the year. The administration is pressuring servicers to ramp up modifications to meet its goal of 500,000 loan modifications by November 1st on the way to between four and five million modifications under program guidelines. While some servicers may have their own reasons for a slow modification pace, the short-sighted design of the program carries some responsibility as well
The financial incentives for servicers to participate in HAMP are appealing: “Most servicers want to do the HAMP program because we get paid [to do it],” said Ocwen’s Erbey. Still, for a variety of reasons including the disallowance of applicants trying to participate in the program, lenders and servicers are doing many more of their own in-house modifications. Estimates are that during the first half of the year there were 1.5 million privately designed modifications executed for homeowners according to HOPE NOW, an industry-led foreclosure mitigation group.
Increasing the speed of both private and HAMP related loan modifications faces another significant challenge in the changing dynamic of foreclosures. Initially fueled by the failures of risky subprime loans, foreclosures are now being driven by rising unemployment, which was running at 9.4% in July. Proof of that is the distress now being felt in the prime mortgages which are now going bad at a faster pace than the subprimes. In previous recessions, homeowners could sell their homes and pull out some profits to buy time while searching for new work. The plunge in prices has slowed selling dramatically and made selling homes at a profit a rarity. With real estate prices across the country down by one third, the same fraction of homes being under water, and unemployment rates expected to hit 10% by year-end the pace of foreclosure activity is expected to increase. The problem is, if there is no income a homeowner isn’t going to be able to make payments no matter how much they’ve been reduced.
The Citigroup mortgage subsidiary has pioneered one of the few programs aimed at helping borrowers who are unable to pay their mortgage due to unemployment. The pilot program has enrolled only about 600 borrowers and has found that the length of the program might to too short to allow homeowners to find new employment in the current environment but the bank is in discussions with Treasury to expand it to reach more people. “The subprime phenomena has been flushed out,” Das says. “You’ve got to innovate around the problems of today.”
So far, the administration has been non-committal regarding both the qualification flaw for participating in HAMP and making adjustments for unemployed homeowners. A Treasury Department spokesman said recently, “The administration is considering many ideas as part of our ongoing efforts to relieve struggling homeowners and stabilize the housing market. No decisions have been made on this matter.”
The Feldman Law Center has initiated an Outreach and Recovery Plan to assist homeowners who have not been able to get their modifications completed due to flaws in the system, problems with the company originally hired to do the loan modification, or difficulties in working directly with a lender. Call them today at (800) 527 8497.