Private or proprietary mortgage modifications are outperforming modifications made through the Home Affordable Modification Program (HAMP) by a two-to-one margin. Does that mean they are a better solution?
On the surface, the government's HAMP appears to be a big failure. Far more homeowners have gone into foreclosure than have obtained mortgage modifications. Those who have been granted modifications still have a 50 percent chance of ending up in foreclosure anyway. In May 2010, five times as many homeowners fell out of HAMP during their trial modification periods than obtained permanent modifications. Of all the modifications granted by lenders, very few are HAMP loan mods. But this ugly picture doesn't tell the whole story.
The chart below is from www.theAtlantic.com:
Lenders testifying before the House Committee for Oversight and Government Reform stated that in many cases borrowers who qualified for HAMP chose a private modification instead. Others did not qualify for HAMP but were offered other modification options. Others opted for short sale or deed-in-lieu of foreclosure options and moved on. Michael J. Heid, co-president of Wells Fargo Home Mortgage, claimed, "Somewhere between 70 and 80 percent of the HAMP cancellations are resulting in some other form of saving the home or avoiding foreclosure."
Before HAMP, most mortgage modifications consisted of capitalizing arrearages, that is, adding them to the mortgage balance and increasing the borrower's payment to eventually get them current on their home loan. Default rates were naturally very high (if a homeowner can't make their normal payments, it's pretty unlikely that they'd be able to make a higher one). Arguably, the government's push for mortgage modifications might have improved private programs. Once loan servicers that took TARP funds realized they would be forced to participate in HAMP, they may have improved their own, non-government modification programs. Perhaps the improvement wasn't forced, but rather directed more at self preservation.
HAMP vs. private loan mods
HAMP is designed to lower your payments to 31 percent of your gross income in three steps. The lender absorbs the cost of getting it down to 38 percent of your gross income, then the government pays 50 percent of the cost to get it to 31 percent. First, your interest rate is dropped to as low as 2 percent. If your total housing expense (principal, interest, taxes, insurance, HOA dues, etc.) is still greater than 31 percent, the next step is to extend the term of your mortgage, one month at a time, to a maximum of 40 years. Finally, there may be a forbearance of principal with a balloon payment due when the property is sold, refinanced or the maturity date of the modified loan is reached.
Private loan mods
Private or proprietary mortgage modifications can take any form the lender wants to offer. They may go through faster -- many lenders are members of HOPE NOW (not to be confused with the government's Hope for Homeowners program), a coalition of mortgage lenders, servicers and housing counselors set up to expedite mortgage repayment plans, workouts and modifications. Initially, the organization relied more heavily on payment plans and workouts; today, it places more emphasis on modification, probably in response to the creation of HAMP.
A borrower whose mortgage is serviced by a lender who is a member of HOPE NOW can get help through the new Hope Loan Port. The site allows them to determine their eligibility for HAMP or other programs, connect with free housing counseling or submit an application for a modification directly through the site. HOPE NOW claims that its site helps borrowers get answers faster than trying to modify through other channels. The added speed may account for the relative success of the program.
Are private mortgage modifications better?
For those who don't qualify for HAMP, perhaps because their property is not their primary residence or because their mortgage amount exceeds the program's guidelines, a private modification is the only way to go. For others, if your lender offers you an acceptable solution in a timely fashion, there's no reason not to accept it. But is a private loan mod better? Not according to the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). HAMP modifications, they report, have resulted in a lower number of delinquencies three months after the modification. At three months, 16.7 percent of HAMP modifications were 30 or more days delinquent, compared with 24.6 percent of all other modifications.
Neither the HAMP nor private modification structure is necessarily best; it's all about the amount by which your payments decrease.
The OCC and OTS report showed that of the more than 429,000 modifications that reduced monthly payments by 10 percent or more, 54.1 percent of them were current at the end of 2009. But of the more than 578,000 modifications that reduced monthly payments by 10 percent or less, only 32.2 percent were current.
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.