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No Miracles in Modification Program

Waiting on a Miracle?

The Home Affordable Modification Program (HAMP) is the administration’s hope for troubled homeowners trying to avoid foreclosure by modifying their current mortgage payments. The original release said the program was:

…aimed at helping 3 to 4 million at-risk homeowners – both those who are in default and those who are at imminent risk of default – by reducing monthly payments to sustainable levels.

HAMP publishes a report each month showing their progress. The May report had some interesting data in it. We want to go over that data in the blog today.

How many modifications have been completed?

HAMP acknowledges that there are over 3 million homes in need of a modification. Thus far, they have offered approximately 1.5 million trial modifications. The results so far: less than 300,000 permanent modifications, which is just a 20,000 more than the number of trials that have been cancelled.

Here is a table which appeared in report:

Will the permanent modifications really work?

The big question is whether the modifications will be a long term solution. One item that jumps off the page is the back end “debt-to-ratio income” (DTI). The report defines this as:

Ratio of total monthly debt payments (including mortgage principal and interest, taxes, insurance, homeowners association and/or condo fees, plus payments on installment debts, junior liens, alimony, car lease payments and investment property payments) to monthly gross income. Borrowers who have a back-end debt-to-income ratio of greater than 55% are required to seek housing counseling under program guidelines.

Why counseling? Because anything over 55% is a re-default waiting to happen. And the report shows a DTI of 64.3%!

Diane Olick of CNBC reported:

The HAMP report puts that at 64.3 percent, meaning you’ve got 35.7 percent of your income to spend once you’ve paid all debt-related bills—not to mention your income taxes! Last month it was 61.3 percent, the month before, 59.8 percent, so it’s getting progressively worse.

“A 64.3% DTI is so far out of scope with the pre-bubble years safe and sound 36% total DTI — and even typical bubble-years full-doc DTI’s of 50% — it is absolutely irresponsible,” says mortgage analyst Mark Hanson. “Servicers are pushing the envelope with respect to getting people to qualify,” he adds.

I have to wonder if any mortgage originator today would even offer a new loan to anyone with those kinds of stats. My guess is no.

What does this mean to you?

I think it is great news that the program has helped almost 300,000 families stay in their homes. Yet, that is less than 10% of the borrowers that need help. Most of the 3 million+ homes will eventually be a short sale or foreclosure. They will enter the market at discounted prices.

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