HAMP loan modifications remain scarce

The federal government’s Home Affordable Modification Program (HAMP) has been officially deemed a failure by the House of Representatives, and legislation has been introduced to end the botched corrective effort. HAMP’s goal was to provide loan modifications for up to four million homeowners nationwide, but narrow qualification requirements left all but 521,630 homeowners ineligible, a meager pittance of individuals compared to the volume of distressed homeowners. Lenders have completed more private loan modifications outside the parameters of HAMP as their own eligibility requirements do not necessarily exclude the unemployed or those with other debts, ponderous hurdles imposed by HAMP.

first tuesday take: HAMP was dead on arrival as those who needed the most help did not qualify. This is akin to feeding the moderately hungry without allocating any food to the starving. Similarly, it has given lenders absolutely no impetus to clear out their toxic loan portfolios or provide any type of long-term relief to California’s 2,500,000 negative equity homeowners. It is up to lenders to complete modifications, but they will not do any favors for California’s legions of distressed borrowers. Their financial objective in modifying is contingent on their pocketbook: to glean the most net present value (NPV), or worth in “today’s” dollars, from each transaction. Whether or not a lender will agree to a loan modification depends entirely on the NPV test and not necessarily the need or financial aptitude of the borrower.

For those negative equity homeowners who owe more than the fair market value (FMV) of their home, a loan modification won’t do much. Unless bankruptcy judges or the states’ Attorneys General are given the authority to force lenders to cram down loan balances, negative equity homeowners will resort to the only financially prudent decision left: strategic default. [For more information regarding HAMP, see the July 2010 first tuesday article, HAMP is losing participants and the September 2010 first tuesday article, Lenders complete more loan modifications independent of HAMP; for more information addressing strategic default, see the April 2010 first tuesday article, The underwater homeowner, his future and his agent: a balance sheet reality check – Part I and Part II and the August 2010 first tuesday article, Fannie Mae, our government and strategic defaults.]