Posted on FT Alphaville by Tracy Alloway:
Did you ever want to see what a mortgage modification from the US government’s Home Affordable Modification Plan (Hamp) looks like?
Here’s your chance. Calculated Risk has got hold of some loan modification documents from Wells Fargo.
The whole document can be found here, with names and addresses removed, but here are a few key points from Calculated Risk:
- The borrower is delinquent and hasn’t made a payment in about one year.
- The trial modification plan (three months) calls for three payments of $1170.82 per month (includes an escrow account for taxes and insurance). This is about $1000.00 less than the borrower’s previous monthly payment
- The borrower owes approximately $330,000 (including missed payments). Wells Fargo is waiving the late fees if the borrower completes the trial modification plan.
- A similar house has recently sold for $150,000 (distressed sale), so the borrower is probably $150,000 to $180,000 underwater.
- Comparable houses rent for close to $1,500 per month. So the borrower is paying less than the going rent on the modified loan.
Under the program, the US Treasury pays borrowers and loan servicers, including the banks, to agree to the loan mods.In exchange, the lender agrees to reduce monthly payments in a “trial” modification period (three months), which is then — hopefully — made into a permanent payment reduction plan. In the above example the borrower has agreed to pay about 46 per cent less in interest than he would otherwise have owed.
So are the banks taking losses on Hamp modifications?
Not from what we understand.
Crucially a Hamp modification does not have to include principal forgiveness or reduction, so there’s not usually a loss there.
Instead, the loss comes from the reduction in interest income — and that, it seems, is borne mostly by the US Treasury and the GSEs, Fannie and Freddie.
What you tend to see in bank results then, is an increase in the delinquency rate since Hamp loans in trial modification are included in that rate.
What you cannot really see is Hamp’s impact on the banks’ charge-off rates.
This, for instance, is from Citi’s third-quarter conference call:
Turning to first mortgages on slide 18, we take a closer look at the delinquency data. Last quarter, we discussed a trend that showed a decline in the 90 to 179 day bucket and an increase in the 180 day plus bucket. The trend in the 90 to 179 day bucket has reversed this quarter, but can be largely explained by the loan modification program known as Home Affordable Modification or HAMP. We have approximately $6 billion of on-balance sheet mortgages in this program. Under HAMP, borrowers make reduced mortgage payments for a trial period, during which they continue to age through our delinquency buckets even if they are current under the new payment terms. This serves to increase our delinquencies. Virtually all of the increase in the 90 to 179 bucket and half of the increase in the 180 plus day bucket are loans in HAMP trial modifications. The rest of the increase in the 180 plus day bucket is attributable to a backlog of foreclosure inventory driven by a slowdown in the foreclosure process in many states. HAMP also reduces net credit losses as loans in the trial period do not get charged off at 180 days past-due as long as they have made at least one payment. Nearly half the sequential decline in net credit losses on first mortgages this quarter was attributable to HAMP. We have provided additional loan loss provisions to offset this impact.
All of which is fine as long as the trial modifications work out and become permanent, at which point all those Hamp loans will jump out of the delinquent bracket and into current status.
However, if house prices continue to fall, home-owners like the one in the Wells Fargo Hamp documentation above — already $150,000 underwater — may well decide to simply decide to walk away. At which point the loan would be in default and the bank would simply foreclose on the property.
In fact there’s a huge question mark over default rates for modified loans. From a Federal Reserve publication:
For example, the Fitch ratings service released a report earlier this year showing the re-default rate for modified subprime, securitized loans was between 65 percent and 75 percent. But a recent Mortgage Metrics Report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision, which analyzed the loan performance at nine national banks and four thrifts with the largest mortgage portfolios, found that “modifications that decreased monthly payments had consistently lower re-default rates, with greater percentage decreases [in monthly payments] resulting in lower subsequent re-default rates.” The report also found the re-default rate for modified mortgages was generally lower if the borrower’s payment was reduced by more than 10 percent.
In light of banks’ third-quarter results, FT Alphaville will be taking a closer look into the Hamp.
There’s a selection of links below if you want to as well.
Fitch projects more RMBS re-defaults as Hamp disappoints - HousingWire
An overview of the Home Affordable Modification Program - Philadelphia Fed
Mortgage modification datapoint of the day - Felix Salmon
Chances are, most Hamp mods won’t work: Amherst - HousingWire
Has mortgage modification failed? - The Baseline Scenario