21% HAMP First Year Redefault Rate

The Congressional Oversight Panel has a new HAMP report out. Like all COP reports, it's long and chock full o' analysis. There's an executive summary up front, but some of the most important points are only in the report proper (especially pp. 100-111). I think there are three big things to take away from the report:  

• First, 21% of HAMP permanent modifications have redefaulted in their first year. That's ghastly given that HAMP permanent modifications have an additional 3 months of trial seasoning and fairly serious payment reductions. The fact that Treasury hasn't been reporting on this itself, much less analyzing the reasons for the redefaults is disgraceful. 

• Second, if past trends continue, starting this month, there will be more HAMP redefaults each month than new permanent modifications. That means that the total number of active permanent modifications will peak at around 500,000 and decline. 

• Third, it looks as if Treasury will only end up spending $4B for HAMP out of the $75B allocated for homeowner assistance. 

My take: Treasury should shut down the program. At this point all it does it provide political cover for the failure to take meaningful steps to help homeowners and stabilize the housing market. But is anyone really buying it?  

Redefault Rates

Treasury has publicly estimated that the redefault rate on HAMP permanent mods will be 40% over five year. Now, just one year into permanent mods, we have already reached a 21% redefault rate. There is no indication that the redefault rate is plateauing, and no reason to think that it will.

The risk factors for HAMP permanent modifications are not front-loaded. A front-loaded risk would be unaffordable monthly payments. HAMP does a reasonable job on lowering monthly payments. But HAMP permanent modifications have high negative equity, balloon payments, interest rates that will rise over time (often from 2% to 5%, meaning a significant monthly payment increase), and high back-end debt-to-income ratios. These are all time bombs. They come in addition to the typical horsemen of default: death, disability, dismissal, and divorce, to which we can add the amplifier of the worst economy in 70 years.

To be sure, HAMP modifications are performing better than proprietary modifications, but that's not saying a lot, and it's also not an apples-to-apples comparison. Unlike many proprietary modifications, HAMP has a 3 month trial period that screens out the weakest borrowers; HAMP modifications should perform better. The Oversight Panel report notes that if one calculated the HAMP redefault rate including the 146,031 trial modifications that failed to convert to permanent because of a payment default (the others failed to convert because they were not eligible due to loan or borrower characteristics), the real annual redefault rate would be 44% and the 15-month redefault rate would be 50%!

My own personal prediction: over 5 years we will see redefaults in the range of 60-80% on HAMP permanent modifications. I hope I'll be proven wrong. But given the current state of affairs, I think we will see only 100k-200k permanent modifications still performing at the end of 5 years, a far cry from the 4 million homeowners the Administration said the program would help. (Unless by "help" you mean delayed foreclosure by a few months). The number of permanent modifications that do not redefault is the most fundamental metric by which to evaluate HAMP on this metric, it is an epic fail, topped only by Hope 4 Homeowners.

Is HAMP a worthwhile program?

It's hard to say that it is. HAMP will help some homeowners keep their homes and avoid foreclosure. That's always a good thing, even if it helps only say 100k homeowners in the end, instead of 4M. And HAMP has had some benefits in terms of creating standards for non-HAMP modifications. But some of the homeowners who keep their homes with a HAMP modification might have been able to keep those homes without HAMP through a proprietary modification that wasn't subsidized with taxpayer dollars. 

Ultimately, the message to take away from HAMP is that the Obama administration just isn't serious about helping homeowners. The plight of distressed homeowners' is subsidiary to protecting the banks from having to take serious write-downs. There's plenty to say about the politics of that decision, but from an economics perspective, I just think it's short-sighted. The economy will not see a robust recovery until there is serious consumer deleveraging and a stabilization of the housing market. Those two problems go hand in hand, given that mortgage debt is the biggest chunk of consumer leverage. And there really isn't any way to deleverage consumers without there being losses for the financial sector. And that all leads to Figure 14 on p. 58 of the report, which shows the second lien loan exposure of the Big 4 banks relative to their Tier 1 capital. Here are the ratios: 

• BoA: 83%
• JPM: 78%
• Citi: 41%
• Wells: 116%

What this means is that principal reductions on any scale will render the Big 4 (and plenty of smaller banks) seriously undercapitalized, if not outright insolvent. And so the game the Administration has decided to play is extend and pretent. Indeed, HAMP's basic goal was to buy time for the banks while the housing market and economy recovered. The thinking was that if lots of properties went into foreclosure and hit the market in 2009-2010, it would drive housing prices even lower, foreclosures would skyrocket, loss recognition would be unavoidable, the FDIC fund would be overwhelmed, and the economy would go into freefall.

As it turns out, there are system capacity issues that limit the number of properties that can hit the market at any time. The system doesn't seem capable of churning through much more than 2 million foreclosures in a year. HAMP might have bought some time, but the gamble on resurrection clearly hasn't paid off yet, unless one defines resurrection downwards. And we're looking another perhaps 10% drop in home prices this year, which combined with a still fragile financial sector and lots of systemic risk from sovereign debt (European and US states). The danger here is that instead of being a successful bid for time, HAMP will have delayed the necessary reboot of the US, making the economy actually more vulnerable to subsequent shocks. Extend and pretend might be politically expedient today, but let's remember how well it worked with the S&Ls. Maybe it buys the Administration through November 2012. But all that does is tie the Administration's hands for a second term agenda.

Comments

[R. Ford]

"Extend and pretend might be politically expedient today, but let's remember how well it worked with the S&Ls."

Isn't it more relevant to remember how well "extend and pretend" worked with the big banks in the wake of the Latin American debt crisis in the early 1980s, or with Citibank in the early 1990s? Which is to say, it worked very well -- the banks were restored to health and the economy recovered reasonably quickly. Those are the relevant precedents that informed the current strategy of dealing with the banks, and there's no evidence that a different strategy would have worked better, or left the US economy in better shape. In particular, the idea that driving the country's biggest banks into receivership at this point will help "stabilize the housing market" doesn't even pass the laugh test.

[mt]

Good post. It is important to shut down government programs that don't do much better than private sector actions. Discipline like that legitimizes the programs that are effective.

[Patrick (G)]

If HAMP did not have the imprimatur of the Treasury Department, it would be more properly be labeled a Mortgage Rescue Scam.

That a few people may be helped by HAMP is not a defense; in a Ponzi Scheme, a few marks do in fact come out ahead--it's what makes the scam credible to the next wave of marks.

[Michelle LaRowe]

I know someone very well who would have liked some assistance with their mortgage and should they have been given something other than a pathetic "foreclosure-fees-of-20K-back-into-a-new-loan-modification" where they lost all their equity they might not be about to slip back into foreclosure again.

There are no suprises here. Dont actually help anyone and then they will stay in the same spot. Send all your jobs to other countries and no one will have work.

These good folks bank told them to skip payments in order to get some real assistance, lost their paperwork more than once and the whole thing was mega-confusing with no real clarity (I like how the president likes to throw the word transparency around).

Nothing the bank said matched up with the HAMP paperwork that intially came out and gave them some hope in the first place.

These people work, they have children, they have improved their property and the neighborhood in which they live. There will be more than one sort of loss should they lose their home.

How many more dogs and cats have to be turned into the animal shelter, how many more children have to cry over losses that they cannot begin to understand?

Back in the 1930's my grandfather's family would have lost the farm that had been in their family since the early 1800's except that the bank (then a locally owned establishment) knew they would pay when they could and put them on a pay-when-you-can plan based on a handshake. They paid and they didnt lose the farm. They were one of the lucky few back in those days but the bank didnt have to foreclose and they didnt lose the land that now bears my family's name.

Concentration of wealth?
Ignoring the cries of the righteous and certainly in many cases deserving?

Is this a democracy or an oligarcy?

Who drugged the Supreme Court last January into calling a corporation a private citizen? Let us not forget that move my friends.

Where are all the real journalists?
Are they just hidden away writing blogs in their spare time while churning out stories about celebrities.

Is there anything left that isnt made in China?
How many people actually have a job in this country, I'm done listening to unemployment statistics, they are manipulated lies.
Reverse it: how many people are actually working and not cronically under-employed?

If you think you know something about poverty and loss I can assure you that you do not until you have worked at a food pantry, as I have, and had a man come in the door crying because he just lost his son in Iraq while at the same time he needs to get free food to make ends meet this month.

Stupid stupid politicans
Lawlessness Makers
America
a gas guzzling
beat up old car
that might have been
something back in the 1950's
with it's show offy wingtips
and Detroit
whitewall tires
Now just
a liablity
on the road
until it breaks down entirely
fix it while you can
Mr. President
fix it while you are still
holding the tools

[Patches]

We all knew HAMP was going to fail. Even our congressmen and women knew. Servicing lobbyist toasted HAMP! Even if a debtor qualified for HAMP, where in the law does it mandate a Modification?

I understand your frustration Michelle.

Get rid of HAMP but replace it with forced mods in 13s! How much will it cost the government? Maybe a little upfront on interest on all of those Troubled Assets purchased but a net positive in the long run..but stable. It's still not too late for the 13 option.

[John R]

What's such a big deal? the Lender's created this crisis against THE LAW! The Law is very specific about these things. Forgive all the mortgages, let the lender's sue, Bankrupt the Banks! All this fall de rall while innocent people (homeowners only, speculators.... go to court!) who had the ABSOLUTE RIGHT to expect a fair, Lawful & honest deal when dealing with the banks and who, we now know were victims of fraud in the inception, have the legal rights to have their loans voided. Let's get er done!

[John R]

Upon re reading I find a mistake... it souldn't be "let the lenders sue" it should be "let the Investors sue" sorry bout that

[Knute Rife]

@ R Ford
The Latin American economies were rapidly expanding and diversifying. The banks were able to rise with that tide. That is not the case here.

The mere fact that Citi survived that round in the early 90s does not mean that was a good fix, as present conditions show. Here in Utah, First Security survived swallowing the toxic pill of American Savings but eventually had to be parted out.

The housing market will not stabilize so long as people are trying to support loans based on false asset values, hoping they can survive long enough to push the price back up the the loan level.

[Corinne A. Tampas]

We all know that the program is a failure. However, I readily admit I am missing something. ... I admit it! ... If the default rate is 21%, does that mean that 79% have not defaulted?

When one turns on CNBC and Fox News, one is bombarded with rhetoric that these folks do not deserve help and proof of that is the high default rate. But, I would venture to say that if anyone one of those talking heads were presented with a diagnosis of cancer and the doctor said, "oh, we cannot do anything for you because the treatment has a 21% failure rate", that talking head would insist on taking that treatment anyway or trying something new.

I guess what I'm saying is that these programs should be expanded to help more people, but if there is a 21% default rate, so what? Try something new!