Is the government’s Home Affordable Modification Program (HAMP) living up to its expectations?  According to a recent report from Fitch Ratings Ltd., it appears that most borrowers who get lower mortgage payments under a federal government program will default within 12 months.  HAMP provides incentives for servicers that modify mortgage payments to within 31% of the borrower’s debt-to-income ratio and is designed to maintain a borrowers current cash flow state.  While the report does not break down residential mortgage-backed securities (RMBS) by age, it is reasonable to believe that some of those modifications have been made to seniors on a fixed income to keep them in their homes.  Many citizens in over 55 received subprime and Alt-A loans that enabled them to receive cash out to support their living needs based upon little to no income documentation to support the underwriting of those loans.  Many seniors are ineligible for products such as a reverse mortgage based upon the amount of cash previously taken out through refinances through either conventional or sub-prime loans. 

Some of the key findings from the report include:

• Modifications continue to be the primary strategy to work out problem loans and account for just fewer than 70% of all loan workouts.
• Fitch Ratings projects 65%75% of modifications on subprime and Alt-A products will re-default within 12 months.
• Re-default levels on prime loans are projected at slightly less, 55%65% within 12 months of modification.
• The use of alternative methods to foreclosure, such as short sales and short payoffs, has increased since mid 2009. Currently, 50% of prime and 35% of subprime and Alt-A distressed liquidation sales are not by REO sale.
• By the end of 2009, the percentage of loan resolutions by completed foreclosure action increased to 25.7%, up from 11.7% in the first half of 2009.

Visit the full Fitch U.S. RMBS Servicers’ Loss Mitigation and Modification Efforts Update II