After more than a year in action, the Home Affordable Modification Program is showing improvement on redefaults. But that improvement will turn out to be brief, and the details demonstrate how little impact the expensive program can ultimately have.
Redefault occurs when a delinquent borrower works with a bank to change the terms of a mortgage, but then after some period of time stops making payments again. It occurs in half of all modified loans, and the alarming rate of redefaults prompts interventionists like Laurie Goodman and Elizabeth Warren to call for more generous principal-reduction loan mods – the idea being that if you give enough money to demonstrated bad borrowers, eventually they will become responsible.
HAMP takes money from your pocket and uses it to mitigate the bank's loss when it modifies a loan. In some cases we're talking about serious reductions in principal balance and a 20 percent reduction in the bad borrower's monthly payment. According to the second quarter OCC/OTC Mortgage Metrics report, these are starting to bring the rate of redefaults under control. The Wall Street Journal reports:
Nearly 11% of borrowers whose loans were modified under the Home Affordable Modification Program, or HAMP, during the fourth quarter were at least 60 days delinquent after six months. That compares with a 22% re-default rate for borrowers with loans modified outside of HAMP.
That's not nothing, and the direct quarter-by-quarter comparisons show a definite comedown in delinquencies at the six-month mark—though the change is substantial only for deadbeats who got haircuts of 20 percent or more.
But dig a little deeper into the report [pdf] and you will see how little meaning there is in a time frame of less than six months. Even loans that received the most charitable modifications start redefaulting at higher rates once you get out to a year or more, with most categories over 50 percent redefault rates at the 12-month mark. The category of de jure government-guaranteed loans (In effect, all mortgages are now government guaranteed) has a whopping 64.8 percent redefault rate. Overall, 49.7 percent of all modified loans are back in default within a year.
Who is paying for all these trips to nowhere? On average, modifications during the second quarter reduced borrowers' monthly principal and interest payments by $427. That includes both HAMP-backed mods and mods worked out privately between the bank and the bad borrower. About 450,000 loans have been modified overall, well shy of the four million Treasury hopes to modify under the program. So a $427 average monthly reduction, spread across 450,000 borrowers, leaves us with total losses of:
$192,150,000 in monthly reductions;
$2,305,800,000 in annual reductions;
$69,174,000,000 over the life of a 30-year mortgage.
You can see why Fannie Mae and Freddie Mac have to keep coming back for more money.
What if HAMP were a success, and reached its goal of permanently modifying four million bad mortgages? The total loss would come to:
But even that doesn't tell the full story. The $427 figure is for all loan mods. Modifications done under HAMP are much more charitable, and end up saving the borrower, on average, $607 per month. Let's assume HAMP could get to its goal of four million modifications while keeping that figure about the same. (It would probably go much higher, because delinquent borrowers who have not yet had their mortgages modified tend to be in more dire condition.) Now we're talking about:
And HAMP is only a $75 billion program. So where is the money going to come from? And when will they stop claiming that taking money from taxpayers (the vast majority of whom have never been late on a mortgage payment) and giving it to deadbeats and stupid banks does anything but drag out the problem?