The Home Affordable Modification Program was launched in 2009 by the Obama Administration to support homeowners under TARP.
The goal of HAMP was "to help as many as three to four million financially struggling homeowners avoid foreclosure by modifying loans to a level that is affordable for borrowers now and sustainable over the long term."
As of April 30, 2013, 306,538 homeowners who were granted a HAMP permanent modification — TARP and GSE HAMP combined — struggled, falling three months behind in payments and thus redefaulting. Often these redefaults result in a less advantageous private sector modification or, even worse, foreclosure.
"We launched this program in response to the worst housing crisis since the great depression," Treasury Assistant Secretary for Financial Stability Tim Massad said in a press call.
"There will always be an inherent risk of homeowner default in programs like this," Massad added.
Approximately 10% of homeowners with an active HAMP permanent modification — a total of 88,000 out of 865,100— have missed one or two monthly mortgage payments and are at risk of redefaulting out of the program.
Redefault rates of the oldest 2009 HAMP permanent mortgage modifications have continued to increase as they age and have reached a 46% redefault rate. The 2010 HAMP permanent mortgage modifications are redefaulting at a rate of 38%.
Not only does redefaulting affect the homeowner, redefaults cost taxpayers money also. In fact, taxpayers have lost $815 million in TARP funds paid as incentives for non-GSE HAMP modification for 163,811 homeowners who later redefaulted.
The Treasury distributed $4.4 billion in TARP funds for 600,152 homeowners’ non-GSE, HAMP permanent modifications as of April 30, 2013. Of that, $2.2 billion was designated for servicer incentives and $770 million for homeowner incentives, according to the Treasury.
Of those funds, 18% of those dollars were paid to cover incentives on HAMP permanent modifications held by homeowners who later redefaulted.
Of the redefaulted loans reported by the eight largest servicers, 31% of homeowners who redefault receive an alternative modification, usually a private sector modification, 22% of homeowners move into the foreclosure process, and 12% of homeowners lose their home through a short sale or deed-in-lieu of foreclosure.
There is some talk that poor service by mortgage servicers has contributed to homeowners redefaulting on HAMP permanent modifications. Massad was quick to note that the entire industry was ill equipped to deal with this crisis and that "some servicers could improve more."
Moving forward, SIGTARP was quick to offer recommendations on HAMP redefaults, recognizing and warning about the danger of redefaults, urging Treasury to change the program to ensure that modifications are sustainable.
Now that there are more than two years left for homeowners to apply for HAMP modifications, there are still many modification opportunities to improve HAMP.
On April 1, 2013, SIGTARP created four new, specific recommendations to curb redefaults and protect homeowners from losing their homes. Recently, Treasury agreed to implement SIGTARP’s recommendations regarding redefaults.
SIGTARP’s recommendations include:
- Treasury should conduct in-depth research and analysis to determine the causes of redefaults of HAMP permanent mortgage modifications and the characteristics of loans or the homeowner that may be more at risk for redefault. Treasury should require servicers to submit any additional information that Treasury needs to conduct this research and analysis. Treasury should make the results of this analysis public and issue findings based on this analysis, so that others can examine, build on, and learn from this research.
- As a result of the findings of Treasury’s research and analysis into the causes of HAMP redefaults, and characteristics of redefaults, Treasury should modify aspects of HAMP and the other TARP housing programs in ways to reduce the number of redefaults.
- Treasury should require servicers to develop and use an "early warning system" to identify and reach out to homeowners that may be at risk of redefaulting on a HAMP mortgage modification, including providing or recommending counseling and other assistance and directing them to other TARP housing programs.
- In the letter Treasury already requires servicers to send to homeowners who have redefaulted on a HAMP modification about possible options to foreclosure, Treasury should require the servicers to include other available alternative assistance options under TARP such as the Hardest Hit Fund and HAMP Tier 2, so that homeowners can move forward with other alternatives, if appropriate, in a timely and fully informed manner. To the extent that a servicer does not follow Treasury’s rules in this area, Treasury should permanently withhold incentives from that servicer.
These recommendations, once fully implemented by Treasury, could help ensure that homeowners who receive HAMP permanent mortgage modifications have affordable and sustainable mortgages and remain in their homes.