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From Banking and Finance Law Daily, July 29, 2013

HAMP redefaults continue to rise, says SIGTARP

By Katalina M. Bianco, J.D.

The number of redefaults under the Home Affordable Modification Program (HAMP) has continued to increase since the inception of the program in 2009, according to the Special Inspector General of the Troubled Asset Relief Program (SIGTARP) in its quarterly report to Congress. HAMP was created as a piece of TARP intended to help homeowners avoid foreclosure.

Background. More than 306,000 homeowners have redefaulted out of HAMP, with 22 percent of those homeowners moving into the foreclosure process while others moved into less advantageous private sector modifications. Of homeowners still in a HAMP permanent mortgage modification, more than 88,000 have missed one to two monthly mortgage payments, putting them at risk for redefaulting out of the program.

An increasing number of homeowners have redefaulted on HAMP permanent modifications every year since the start of HAMP in 2009. Treasury Department data indicates that the longer homeowners remain in HAMP, the greater the change that they will redefault, mainly because their modifications were not sustainable, said SIGTARP. Currently, homeowners are redefaulting on the oldest HAMP permanent modifications at a rate of 46 percent.

Factors causing redefaulting. SIGTARP says that anecdotal evidence suggests that poor service by mortgage servicers contributes to homeowners redefaulting on HAMP permanent modifications. Circumstances that homeowners allege include:

  • servicer payment calculation or payment credit errors;
  • problems following a transfer of mortgage ownership or servicing rights;
  • lost paperwork;
  • dual tracking—a servicer moves ahead on the foreclosure process while a homeowner is in the HAMP modification process, a move prohibited under HAMP;
  • a servicer not honoring a HAMP permanent modification; or
  • homeowners with a change in circumstances.

SIGTARP analyzed Treasury’s HAMP data and found some clear patterns among homeowners who have redefaulted. Homeowners must likely to default:

  • received the least reduction in their mortgage payment and overall debt;
  • are still underwater on their mortgage, owing more than the home currently is valued; and
  • have subprime credit scores at the time of modification as well as a high overall debt burden.

Recommendations. On April 1, 2013, SIGTARP made four recommendations to Treasury to lower redefaults. SIGTARP reports that Treasury has agreed to implement the recommendations.

SIGTARP recommended that Treasury:

  • conduct in-depth research and analysis to determine the causes of redefaults and the characteristics of loans or the homeowner that may lead to higher risk of redefault—the results of this research should be made public, and Treasury should issue findings based on the analysis;
  • modify aspects of HAMP and other TARP housing programs based on the findings of Treasury’s research and analysis into the causes of redefault;
  • require servicers to develop and use an “early warning system” to identify and reach out to homeowners that may be at risk of redefaulting, providing or recommending counseling and other assistance and directing them to other TARP programs; and
  • require servicers to include other available assistance under TARP in the letter servicers already are required to send to homeowners who have redefaulted on HAMP modification about possible alternatives to foreclosure.

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