Original posted on the Housing Wire by Diana Golobay:
The administration’s Home Affordable Modification Program (HAMP) has not achieved its objectives, according to a viewpoint by asset manager BlackRock (BLK: 211.81 -0.17%), therefore it’s time to think outside the box. Instead, more effective homeownership retention efforts could employ a different seniority in modifying — and extinguishing — consumer debt.
While HAMP originally aimed to reach 3m to 4m borrowers when it began a year ago, servicers so far converted only 170,000 trial HAMP modifications into permanent status, according to the latest report from the Treasury Department.
And even where mortgages are modified and monthly payments decreased by 20% or more, borrowers re-default at a rate of almost 39% 12 months after modification, BlackRock said in the viewpoint provided to HousingWire.
A fundamental issue within HAMP — aside from its failure to keep homeowners in their homes — is the way it “rewrites” creditor rights, according to BlackRock. By requiring servicers to forbear on or modify the first lien, these workouts put first lien holders in a “first risk” position rather than in a secured debt-holder position.
While BlackRock continues to support government efforts to keep homeowners in their homes, it also warned that HAMP has the knock-on effect of benefiting holders of home equity loans and unsecured consumer loans at the expense of first lien investors.
“As a fiduciary for investors and a major investor in the mortgage sector, we are concerned that the current approach is not achieving its objectives and is creating unintended negative consequences that have longer-term implications for both homeowners and the capital markets,” BlackRock said.
In HAMP, junior debt like credit cards, auto loans and second liens are not impaired. Instead, servicers are actually incentivized to restructure the senior secured debt, the principal mortgage. HAMP transforms first liens into the first loss:
BlackRock recommended creating a new consumer bankruptcy option it calls “Judicial Mortgage Restructuring.” This option would not involve bankruptcy “cramdown,” in which BlackRock said the court can possibly re-equitize borrowers at the expense of first lien mortgage holders. By bifurcating the mortgage into secured and unsecured pieces, the court can treat the “unsecured” piece as though it were an unsecured loan along with the borrower’s other debts.
Not so, in a “Judicial Mortgage Restructuring.” Under this option, BlackRock said, the court would reduce the borrower’s debt in order of seniority similar to that applied in current bankruptcy cases. The court would first extinguish unsecured debt — like credit cards — and then reduce “undersecured” debt — like auto loans — to target an “affordable” debt-to-income ratio.
Only at the end of the process, in cases when affordability is still not reached, the court would modify the first lien mortgage.
“This approach would eliminate the highest cost debt, would preserve the rights of first lien holders relative to less-secured or unsecured creditors, and would address the concern that ‘cramming down’ first liens endangers the future of residential finance,” BlackRock said.
The court would consider all household income and debt in this process, unlike in HAMP, which only considers first mortgage debt in the debt-to-income ratio. Borrowers would also be limited in accumulating new debt under this option, BlackRock said.