Ted Gayer, Co-Director of Economic Studies, Brookings Institute
The U.S. Department of the Treasury and the Department of Housing and Urban Development released June data for the Obama administration’s Home Affordable Modification Program (HAMP). HAMP is the foreclosure prevention program targeted at borrowers who are delinquent in their mortgage payment or facing imminent risk of default on their mortgage.
It has always been an open question whether HAMP would prevent foreclosures or whether it would just delay inevitable foreclosures. While those who qualify for HAMP receive reduced mortgage payments through lower interest rates or extended loan terms, the key driver of foreclosures has been the high levels of negative equity (according to Corelogic, about 24 percent of residential properties with mortgages have principal balances greater than the market value of the house), compounded by the persistently high level of unemployment.
The June HAMP report suggests that the program is indeed delaying rather than preventing foreclosures. There have been about 1.3 million trial modifications started by HAMP, which is only a slight increase from the previous month. (A trial modification becomes permanent after three months if the borrower makes timely payments at the modified rates.) Of these approximately 1.3 million trial modifications, about 520,000 have been canceled, which is an increase of about 90,000 from the previous month. About 364,000 of the trial modifications are still active in the trial stage, but the trend suggests that most of these will be canceled rather than become eligible for permanent modifications.
Even the permanent modifications might not be so permanent. The number of permanent modifications that were canceled increased from 6,357 to 8,823 from May to June. And the June numbers suggest that we can expect more cancellations of permanent modifications. The median borrower who received a permanent modification had a back-end debt-to-income ratio of an alarmingly high 79.9 percent before the modification. (The “back-end” ratio includes all mortgage principal and interest payments – including from second mortgages – plus such things as property taxes, homeowner insurance, and condo fees.) Even after receiving the modification, the ratio drops only to 63.7 percent, which is still a large debt burden, especially for someone with negative equity.
I’ve written before about how the first-time home-buyer tax credit does not help the underlying problem of excess inventories in housing, and thus at best just delays the housing market adjustment. Recent housing market data, such as the collapse in monthly new home sales, provide evidence of the “pay-back” following the expiration of the tax credit. Increasingly, it seems that HAMP similarly has delayed – not prevented – an inevitable increase in housing supply stemming from foreclosures.
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