The government today released its monthly report on the Home Affordable Modification Program (HAMP) for struggling mortgage borrowers; the report showed that about 1.2 million trial modifications have been started under the plan and about 281,000 homeowners have been dropped from the program as of the end of April. A total of 295,348 home owners have received permanent loan modifications since the program began. The Obama Administration touts these numbers as evidence of success; the media today were harsh about the number of failures and relatively small number of successful permanent modifications.According to Ghazale Johnston, executive in Accenture's banking practice, one major cause of the HAMP dropouts is that until recently, mortgage servicers have relied on stated income, rather than verified income, to put borrowers into trial modifications. "Once they verify the income, then they've found out that the borrower is not eligible based on the parameters of the program," she says. "Some borrowers are subsequently falling out." (The disparity between stated and verified income doesn't necessarily mean these borrowers are lying; income can be difficult for some people, such as hourly workers, to calculate.) This is likely to change with new Treasury rules that take effect June 1 that will require all borrowers going into a trial modification to be approved based on verified income.
Another group of borrowers are falling out of HAMP because of missing paperwork, Johnston says. "There are two opinions around that," she says. "One is that the borrowers are not providing the paperwork and they're therefore unable to complete the transaction, others say borrowers are providing paperwork but that it's not being processed fast enough or has gotten lost by the servicers."
Johnston believes that banks should not be discouraged by today's report. Loan modifications are just one tool banks can use to recover from the subprime mortgage crisis, she notes. "HAMP has its advantages, it's reaching some borrowers and it's got a moderate level of success," she says. "However, there are a lot of borrowers who won't ultimately be eligible or approved for a HAMP loan modification and banks need to be prepared for alternative programs to support those borrowers or they will never solve the entire problem."
The Wall Street Journal ran an article on today's HAMP report that focused on the number of loan-modification dropouts. Most of the 25 reader comments we saw reflected the view that these mortgages are all subprime loans that should never have been made in the first place.
But according to Johnston, the number one reason for hardship among these borrowers is unemployment or lack of income, the result of bigger macroeconomic factors. "Until unemployment or underemployment decreases, the reason for the hardship won't go away," she says.
From a technology point of view, the HAMP and related HAFA programs (as well as the subprime crisis itself) are driving banks to obtain better historical data for mortgages, track payments better, and analyze their mortgage portfolio performance more accurately. "The Administration has now outlined plans for servicers that will require them to provide detailed reports on mortgage performance," Johnston says. "They've laid out detailed requirements around servicer compliance, program execution and homeownership experience. Servicers will have to keep track of data throughout the loan modification process and be able to store and report on it."
Some servicers have already begun to address gaps in their current platforms around audit trails, loan reporting, and portfolio management, Johnston says. "Historically, when these systems were put in place to support mortgage servicing, it was transaction oriented, it was designed to post payment, support an address change, support tax in escrow processing - one-time only transactions," she says. "Whereas now you're talking about supporting a business process that has the ability to track payment information over a longer period of time and be able to do trend analysis on that information."
One might have expected mortgage servicers to have had the means to track mortgages all along. But Johnston points out that during the pre-credit crisis era, mortgage servicers had, at most, 1% of their portfolios in default and manual processes were fine. "Now, a lot of these servicers have up to 15% of their portfolio in default," she says. "The volumes are so high, it's forced them to revisit or revitalize their systems."