On January 28, 2010, the Treasury Department announced procedural changes to the Home Affordable Modification Program (HAMP). The changes will be implemented to increase the percentage of borrowers who progress from trial modifications to permanent modifications.
Mortgage Modification Red Tape
The amount of paperwork required to turn a trial modification into a permanent one is onerous -- pay stubs, bank statements (all pages), tax returns (signed), hardship affidavits, and supporting documentation for them -- and complaints about provided documentation being lost by mortgage lenders are widespread. In addition, the accompanying forms are complicated, far more so than the mortgage application it takes to get a home loan in the first place. Wells Fargo representatives indicated that 25% of those in trial modifications failed to provide all of the required documentation, and 10% sent in no paperwork at all.
The majority of homeowners are not financial sophisticates, and many may be under the mistaken impression that once they are granted a trial modification with a lower payment, they only need to make three payments on time to make it permanent. This is not the case.
New Home Loan Modification Procedure: No Trial Until the Paperwork Is in Order
The Treasury Department's procedural changes mean that borrowers will have to submit all required paperwork before any trial loan modification can begin -- and the loan modification would automatically be made permanent when all three trial payments are made on time. This way, homeowners won't drop out of the program because of paperwork failure, because everything will be in order before the trial begins. As a result, watch for the percentages of "successful" mods to rise sharply in the coming months.
Same Documentation Requirements but Easier Submission
Homeowners will still be required to send in pay stubs, provide tax returns and a hardship affidavit, but the tax returns and affidavit can be submitted electronically. "We are making it as easy as possible for homeowners to provide the documents," said Herb Allison, Treasury's Assistant Secretary for Financial Stability. While it's debatable whether online document submission is any easier or faster than faxing, e-mailing documentation should at least cut down on loss of paperwork on the mortgage lenders' end.
HAMP Changes that Didn't Happen
It was widely anticipated that the process would be changed to provide more mortgage assistance to those who have lost jobs, as many of them have too little income to qualify for home loan modifications. However, no such changes to the program were announced.
Another change that was reported to be in the works was a provision to encourage more lenders to reduce principal balances on underwater loans. Studies have shown that the more underwater a home is, the more likely the owner is to "strategically default" on the mortgage, even an affordable mortgage. This change was not implemented, probably because there is no way to reduce the principal on some homeowners' loans without effectively punishing their neighbors who have continued to make their payments. A principal-reducing provision could very well induce others into defaulting in order to get reductions as well. Michael Barr, Assistant Treasury Department Secretary for financial institutions, said, "You have to be very careful not to design a program that would change people's fundamental behavior across the country in a destabilizing way or would be widely perceived as unfair to people who are continuing to pay."
Foreclosures Still Rising
Meanwhile, mortgage foreclosures have not slowed down. According to RealtyTrac, a source which gathers foreclosure data nationwide, in 2009, foreclosures hit 2.8 million -- up 21% from 2008 -- and up a whopping 120% over 2007.
Meanwhile, mortgage servicers are expanding their modification efforts. The Treasury Department updated its statistics in January and indicated that HAMP had 853,696 borrowers in trial modifications at the end of December 2009, 125,288 more than November's total. Only 7% of homeowners in the 902,620 trial modifications have been granted permanent changes so far. An additional 46,056 permanent modifications only need borrower signatures; this would increase the total to about 12%.
Mortgage servicers will be required to take borrowers' documentation upfront beginning June 1, 2010, but they can start doing so immediately if they choose to do so.
Gina Pogol has been writing about mortgage and finance since 1994. In addition to a decade in mortgage lending, she has worked as a business credit systems consultant for Experian and as an accountant for Deloitte.