A recent expansion of the Home Affordable Modification Program is expected to result in 500,000 mortgage modifications that otherwise would not have taken place, bank analysts said.
In January, the Treasury Department made several changes to the program. First, it extended the application deadline to the end of 2013, expanded debt-to-income requirements, allowed investors with rental homes into the program, and announced it would pay investors triple for principal reductions.
JPMorgan Chase [[JPM]] analysts said in a report Monday they expect 1.7 million additional borrowers could qualify for the program under the more lenient DTI requirements – meaning more of their debt not just their first lien mortgage would be calculated in.
Another 500,000 investors who rent out properties could potentially get modifications. And the higher fees on principal reductions could usher in 200,000 borrowers that previously had negative net-present-value results – the test used to determine if a modification was in the best interest of the bank instead of foreclosure.
"If we assume a 20% pull through rate, a fairly reasonable assumption, then the potential modification boost could amount to less than 500,000," the Chase analysts said.
Since the last changes to HAMP in 2010, which included new documentation requirements, monthly modification totals remained stable (see the chart below).
Analysts expect the same kind of smooth adjustment this time, meaning foreclosure delays would not be impacted in a meaningful way. This, they said, was a positive for volatile home prices and bonds.
The administration originally estimated HAMP would reach between 3 million and 4 million borrowers, but the Congressional Oversight Panel said because of servicer difficulties and strict requirements, the program would net roughly 800,000 permanent workouts after redefaults are factored in.
Analysts said the principal reduction changes would certainly lead to more writedowns than the 34,400 active through November.
"Certainly, we should see continue to see a larger share of (principal reduction) modifications going forward," the analysts said. "We will leave the debate about (principal reduction) modifications somehow igniting morally hazardous strategic defaults to the philosophers."