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In Loss Severity, Amherst Favors Short Sales to HAMP

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A report from Amherst Securities Group indicates programs that support short sales could be the most effective loss mitigation approach, as they minimize loss severity. Amherst researchers also said the Hope-for-Homeowners (H4H) program is a “powerful alternative” to the Home Affordable Modification Program (HAMP). Amherst researchers point to H4H’s ability to mimic the impact of short sales, such as a one-time loss on the loan, which provides a softer loss severity than foreclosure sales. “In all cases, the loss severity on the short sale is 15-20% less than on the foreclosure sale,” Amherst researchers reported. Borrowers completing the H4H program become re-equified and refinanced into a new Federal Housing Administration-insured mortgage, while HAMP provides capped incentives to servicers to modify mortgages in danger of foreclosure. The US Treasury Department then adjusts the HAMP incentive caps based on the level of actual participation. Plans for the “new and improved” H4H program could be released within the next two months, resolving enough issues to maximize the net present value of loans in bank portfolios but “unlikely” to be used for loans in private label securitizations, according to the report. “This is a superior alternative to either the HAMP modification or foreclosure,” Amherst researchers reported. Even though borrowers would make the same payment under the two programs, 31% of their income, Amherst expects higher success rates with H4H because the borrower is re-equified and re-underwritten to make sure he or she qualifies for the loan, and H4H extinguishes the second mortgage. Servicers and investors agree that HAMP is particularly less useful to pay-option adjustable-rate mortgages (ARMs) borrowers because of the difficulty to reduce payments from their current levels. HAMP’s 40-year term extension doesn’t help many of the option ARM mortgages that are already at a 40-year term. Also, these borrowers have mortgages that are less affordable, on average, than any other product type, according to the report. “Once the new H4H program is implemented, we expect portfolio lenders to make considerable use of the program,” Amherst researchers reported. Treasury and housing officials are in the process of finalizing a federal incentive program that will encourage servicers to pursue short sales and deeds-in-lieu of foreclosure. Details may arrive within weeks, spurring servicer participation in short sales, according to Treasury sources. Write to Jon Prior.

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