Mortgage Modification: Revamping HAMP

The government's loan modification process (Home Affordability Modification Program or "HAMP") is an abject failure in its current form. Complaints abound from underwater homeowners (it's estimated that over 1/4 of homeowners owe more than their home is worth), banks and loan servicers about the documentation; the ability to morph from temporary modifications to permanent ones; and the inequality of first and second mortgage holders.


Almost every expert agrees that loan forgiveness is the key, but thus far, banks have been reluctant to write down loans because of the balance sheet impact. This "pray and delay" or "extend and pretend" strategy can only work if the economy and house prices recover quickly. Anyone think that's happening?

I also understand from a few in the know that some in the White House detest the idea of write-downs because of the implicit moral hazard. Um, it's a little late to worry about that as millions of foreclosures loom. The process is already forcing many to walk away, so let's figure out how to help both sides.

Unfortunately we didn't get a principal reduction mandate yesterday with the revamped HAMP. Instead, the government introduced new rules on documentation and guidance on converting temporary modifications into permanent ones. The changes seem mostly good, except one strange loop hole thing that my housing and mortgage maven pointed out to me yesterday on page 10 of the directive (the bold part is mine):

Supplemental Directive 09-01 requires servicers to reevaluate a loan using the NPV model if the borrower's documented income differs from the stated income used in the borrower's initial qualifying NPV test. With respect to trial period plans with effective dates prior to June 1, 2010, servicers may elect, in accordance with existing servicing agreements and investor guidelines, to offer the borrower a permanent HAMP modification without performing an additional NPV evaluation based on the borrower's verified income documentation. If the servicer elects not to perform an additional NPV evaluation in this situation, the servicer should enter the trial period values for NPV Date and NPV Value when reporting the official loan set up file to the Treasury system of record.

In other words, you have to perform an updated net present value (NPV) evaluation, except when you don't!
You really have to love the government...and the beat goes on.

If you've had personal experience with the HAMP program, please share your story in the comments.

Image by Flickr User BasicGov, CC 2.0