The headline blared across the front page of USA Today: 20,000 military members, vets faced foreclosure in 2010. This is the highest number in 7 years. Military families and vets are not immune from the crisis in the housing markets, and they have found it just as difficult to get help.

Pursuant to that, Valparaiso School of Law Professor Alan White broke down some numbers of the HAMP program for Public Citizen, and finds a real disaster:

On Monday the Treasury Department released its loan-level data files on the more than 2.5 million mortgage borrowers who have sought help from the Home Affordable Modification program. Not surprisingly, the data confirm that homeowners are being done in by paperwork. For example, of the 1.2 million homeowners who were non-accepted (Treasuryspeak for rejected), only 6% were turned down because they failed the net present value test, i.e. because a modification wouldn’t make economic sense for the investor. Much more common were denials because the homeowner was not considered to be payment-stressed (20%), not in imminent danger of default (11%), couldn’t meet paperwork requirements (21%) or had the misfortune to have an ineligible mortgage (18%). Many of those identified as having withdrawn applications (8%) could also have fallen victim to the paperwork shuffle.

Keep in mind that the bank habitually loses paperwork or asks the borrower to resend it multiple times. Three times as many applications were turned down for a trial mod because of paperwork issues than because of a failure of the net present value test. In addition, the borrowers who are seeking help but aren’t considered payment-stressed by the bank’s formula could clearly get a workout, especially if they risked default.

But this gets even worse when you look at the borrowers granted a trial mod and denied a permanent mod.

As for the 600,000 who were approved for trial modifications, but then were denied conversion to permanent modifications, only about 25%, i.e. about 13% of all trial modifications, failed to make payments. The dreaded “incomplete request”, “request withdrawn” and income-too-high categories account for more than half of the trial modification fallouts. Particularly unjustifiable are the tens of thousands whose permanent modifications were denied based on eligibility or NPV determinations that should have been made before they started a trial modification.

Once again, paperwork is a major culprit. But as Alan White says, eligibility requirements accounted for a substantial amount of permanent mod failures. This reinforces the theory that the stringing along of the trial modification is creating the eligibility failure in many cases. If the difference between the original and modified payment keeps getting tossed into unpaid principal balance, gradually the monthly payment with a permanent mod gets higher, as the interest rate is calculated from UPB. Eventually, this goes over the 31% standard of the net present value test and creates the denial. That’s just predatory lending, to squeeze out a few more payments from a borrower who won’t get a mod.

A paper from the Chicago Federal Reserve shows that modifications are pretty low considering the flood of foreclosures in this period, and far lower for securitized loans – where a servicer is involved – than bank-owned loans. The banks and their servicer subsidiaries are unwilling, not unable, to deal with this crisis. And the data show that the traditional method of mortgage lending – where the bank holds the loan – turns out to be far better during a default event than this securitization nonsense.

The failure of HAMP is not inevitable. While it may have resulted in fewer than a half a million successful permanent modifications, two and a half million homeowners have sought help. Most of those who fail initially or at the conversion stage are not failing because their cases are hopeless. On the contrary, many are rejected for reasons that suggest workouts are possible (such as those whose debt ratio is not high enough for HAMP.) The program suffers seriously from lack of enforcement, from needlessly detailed and prescriptive rules, and from the Administration’s unwillingness to confront the principal reduction issue.

David Dayen

David Dayen