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2010-08-12 17:54:07

Scandal Simmers over HAMP Re-defaults

Friday the Treasury Department issued its second monthly “scorecard” on the Housing Affordability Modification Program (HAMP and deep in the news release’s eighth paragraph was an asterisk that may determine whether the $50 billion program was worth its cost.

 The asterisk corrected the last scorecard on HAMP, which hugely misstated the rate that borrowers whose loans have been modified re-default on their loans when Treasury issued its June HAMP report on July 19.   Within a few days, Treasury officials acknowledged some errors were made. .  (See UPDATE: Treasury Backtracks on HAMP Re-defaults).  HAMP’s re-default rate is critically important because, in the final analysis, the program must keep the vast majority of its graduates from re-defaulting for at least 90 days after they receive a permanent modification program if it is to have any impact on foreclosure rates.

 The new number for re-defaults of HAMP permanent modifications in place six months that are 60 days delinquent or more, is about 10 percent.  The default rate for over 90 days delinquent is about 6 percent.  The numbers released last month were 2 percent for loans six months old and 90 days or more delinquent and fewer than 3 percent of homeowners in permanent modifications in default. at nine months.

“There is no other way to say this: we’re being lied to. Willfully,” wrote Paul Jackson in Housing Wire.  “The only way to come up with a 1.7% re-default rate is to change how re-defaults are calculated. And that, dear readers, is precisely what our government did.”

Though twice as large as the original numbers, the new ones are still low and the differences may not seem critical but for two factors.  First, influential financial services analysts including Fitch Ratings predicted before the first numbers were released that re-defaults will be much, much higher‒over 65 percent of HAMP borrowers.   Several, including Barclays Capital, challenged the first set of re-default numbers, setting off the controversy. Treasury’s backpedaling is cost it credibility and giving its critics ammunition.

 Equally unsettling were comments made by MITRE Corporation, the consultant hired by Treasury to clean up the mess, in its final report.

 “Fannie Mae’s initial development of the Re-Default Table generation software may not have had the level of detail and clarity necessary to assure accurate coding. This needs to be verified in a formal cause analysis, said MTRE’s report.   “The fact that errors were introduced into the original June 2010 Re-Default Table, and the highly visible nature of the information, it is clear that a more rigorous test/validation process for Re-Default Table generation should be implemented by Fannie Mae going forward.”

 HAMP’s predecessor, Hope for Homeowners, and private sector modifications through the Hope Now program suffered large scale defaults that limited their effectiveness.  HAMP was designed to learn from their mistakes.   Monthly payments were reduced to 31 percent of household gross annual income.  Counseling was required for borrowers carrying too much consumer debt.  Secondary loans as well as primary mortgages were modified.  A three to five month trial period gave borrowers time to get accustomed to making their new mortgage payments on time.

 Eighteen months and billions of dollars later, we won’t have long to wait to see if it worked.

 From Real Estate Economy

Steve Cook is a nationally recognized speaker and author. He has worked with various companies and organizations as a consultant. He has an extensive background in public relations, journalism and politics. Check out his Real Estate Economics Newsblog on RealTown. Contact Steve at 



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