Barclays Expects Fewer HAMP Defaults as Servicers Begin to Modify ‘Better’ Borrowers

Newer modifications provided under the Home Affordable Modification Program (HAMP) are less likely to default due to “better” borrowers entering the program, and adjustments servicers and the Treasury Department are making, according to a report from Barclays Capital. “These are borrowers who have managed to keep paying through times of severe economic distress and turned delinquent only recently,” according to the report. “We believe that these are inherently better quality [borrowers] who have a higher propensity to pay once modified.” The Treasury launched HAMP in March 2009 to provide incentives to servicers for the modification of loans in default. Those servicers have conducted more than 340,000 permanent modifications and started 1.5m three-month trials through May 2010. The Treasury originally estimated that 375,000 mortgages would be permanently modified by the end of 2009, but by December only 66,000 reached this status. The Treasury has yet to update its expectations for 2010, despite the modify rate ratcheting up. Analysts at the credit rating agency, Moody’s estimated that home prices were likely to drop another 8% from Q409 to the end of 2010, citing the “underwhelming” success of HAMP. Analysts at another credit rating agency, Fitch, forecasted that 55-to-75% of modified mortgages would re-default. But according to BarCap, new modifications are less likely to fall into that range, for many reasons. The Treasury and the Department of Housing and Urban Development made an adjustment to the program in January 2010, requiring servicers participating in the program to collect all financial documentation from a borrower before moving him or her into the three-month trial. This policy was to start June 1, 2010, but some servicers such as Bank of America (BAC) put the policy into place before. This adjustment, according to BarCap has resulted in stronger borrowers entering the program, reducing the chances of re-default. Newer modifications not only have lower interest rates, but oftentimes also principal discounts, resulting in more “meaningful” reductions in monthly payments, the BarCap report states. Write to Jon Prior.

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