Much is being said about how the federal Home Affordable Modification Program (HAMP) should be handled. The US Treasury Department recently said HAMP targets a “subset” of distressed borrowers and other foreclosure alternatives will have to be used. There’s plenty of finger-pointing to go around, and a number of culpable parties, but no consensus regarding whom is really to blame. Here’s a contribution from one of our sources who feels it needs to be said. We agreed to run anonymously due to the highly contentious nature of HAMP and other borrower workouts these days. NOTE: The following is a contributed piece from a HousingWire reader. It does not represent the views or opinions of HW staff. When it comes to figuring out why the HAMP loan modification initiative out of Washington is not working as well as expected, it may be useful to look at why, rather than who. By the end of 2009, of the 680,000 borrowers in the initial trial phase of various government-sponsored mod programs (274,000 in HAMP), barely 10% had made the conversion to permanent status. Blame has been laid at the feet of just about any available victim in reach, but let’s look at some mechanics before tarring and feathering anyone. HAMP was designed well for banks that want to hold onto loans. It requires lenders to reduce the borrower’s interest rate first then offer a forbearance of principal, which works great for banks with a low cost of funds. When you have a half-percent interest rate on deposits and a two percent income on a modified mortgage, it’s still a good spread and performance model. But HAMP is proving unattractive for the private investor, who ironically is more willing to offer principal forgiveness. The problem for these investors is the 2% interest rate with HAMP, which is not a profitable structure as it is for depository institutions. Banks will try HAMP then pursue other foreclosure alternatives like short sales and deeds-in-lieu, which may help. So, while the economics of HAMP are structured to attract the big banks into the program, they can’t do all the workouts themselves – it’s overwhelming their traditional servicing models (think 10% delinquencies of 60m mortgages and you get the ugly picture).