HAMP---50% Failure Rate For Trial Loan Modifications

The government's Home Affordable Modification Program released their monthly report and it is not very encouraging. The main reason is because these people cannot afford their homes. Here is the a chart which summarizes the entire program and shows the total number of mortgage modifications.

You can see that of 1,334,117 trial modifications 663,538 were cancelled, which results in a failure rate of just under 50% for the program. The main problem is that borrowers cannot afford the new monthly payment even after the loan modification. For example, after the loan modification the average borrower's back-end-debt-to-income ratio (which includes total debt repayments like car, mortgage, insurance,etc) is 63.5%. This is not sustainable and of course ends with the borrower defaulting. Another problem with these modifications is that they do not reduce principal and rely on more gimmicks like reduced interest rates and term extension. The only real solution is debt forbearance. I don't like the idea but if the goal is to keep these people in their homes, then it is the only viable option.

Some may see the 448,937 permanent modifications and think the program is working. You should not. The reason for the low default rate on permanent modifications is because the majority of them were initiated after Jan 2010 so they are still new. Just give it time and you will start to see the default rate increase dramatically. 

Black Swan Insights 



  1. Owning a home is the wish of many people and since there are many ways to own one, you can decide to get one on a loan instead of waiting to save enough before you can buy it.

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