According to the Congressional Oversight Panel:
Although HAMP modifications reduce a homeowner’s mortgage payments, many borrowers continue to experience severe financial strain. The typical post-modification borrower still pays about 59 percent of his total income on debt service, including payments on first and second mortgages, credit cards, car loans, student loans, and other obligations. Furthermore, HAMP typically does not reduce the total principal balance of a mortgage, meaning that a borrower who was underwater before receiving a HAMP modification will likely remain underwater afterward. The typical HAMP-modified mortgage has a balance 25 percent greater than the value of the underlying home.
Most borrowers who proceed through HAMP will face a precarious future, but their resources will be severely constrained. With a majority of their income still tied up in debt payments, a small disruption in income or increase in expenses could make repayment almost impossible. Many will have no equity in their homes and are likely to question whether it makes sense to struggle so hard and for so long to make payments on homes that could remain below water for years. Many borrowers will eventually re-default and face foreclosure. Others may make payments for five years under a so-called “permanent modification,” only to see their payments rise again when the modification period ends. The re-defaults signal the worst form of failure of the HAMP program: billions of taxpayer dollars will have been spent to delay rather than prevent foreclosures.
More good reading from the Congressional report:
Treasury has stated that its estimate for HAMP permanent modification redefaults is 40 percent within the five years,178 and the Panel has previously expressed concern that the redefault rate could be significantly higher, if adjustments for actual market conditions are made to Treasury’s models.
It is generally too early to draw firm conclusions about the performance of HAMP permanent modifications. The initial signs are not encouraging, however. Overall, for permanent modifications for which there is full information, 16.85 percent of HAMP modifications were 30-59 days delinquent, 5.94 percent were 60-89 days delinquent, and 1.3 percent were 90+ days delinquent. (See Figure 25, below.) Additionally 1,473 permanent modified mortgages, or 0.8 percent of permanent modifications were foreclosed. These rates reflect only a few months of loan performance; they are not annual rates.
Treasury’s success will ultimately be measured not by the number of mortgages modified but by the number of homeowners who avoid foreclosure. The programs have made progress in helping some whose loans can be prudently modified. It appears, however, that Treasury’s programs are vulnerable to several weaknesses that could undermine the long-term sustainability of mortgage modifications.
Treasury needs to support all three elements of successful modifications: commencing modifications, converting modifications to permanent status, and sustaining modifications. Of these three elements, the last has received the least attention, even though it is in many ways the most important. A modification that eventually redefaults represents only a stay, not a reprieve – a stay purchased at significant taxpayer expense.
Yet, even those families who are able to qualify for a modification and manage to make every payment on time may face difficulty after five years; although the modifications are called permanent, in fact, the interest rates and therefore the payments can rise after five years. The phase out of modification terms could create significant sustainability challenges for families who have otherwise been successful under the terms of the modification, especially for those families still underwater on their properties. Unless housing prices recover to a sufficient degree – which appears unlikely – or the economy rebounds notably, these families may find themselves back in an all too familiar situation of desperation.
Everybody is saying the same thing. No matter where you get your information, there is no arguing the fact that loan modifications are not working, that banks have been doing nothing but wasting time and costing their investors money by waiting to foreclose.
The Congressional Oversight Panel April Report