Fitch: End of HAMP Reduces Options for Struggling U.S. Homeowners

Fitch Ratings-New York-14 November 2016: The end of the U.S. Treasury's Home Affordable Modification Program (HAMP) should translate to fewer loan modifications, with those completed coming from proprietary modification programs with quicker decision making for struggling U.S. homeowners, according to Fitch Ratings.

Launched in 2009, HAMP was designed to provide financial incentives to homeowners, servicers, and investors to modify the first lien mortgage of qualified borrowers who are behind on their mortgage, or in danger of imminent default due to financial hardship. HAMP loan modifications have accounted for approximately 50% of all loan modifications completed this year.

The end of HAMP, scheduled for Dec. 31, 2016, comes against a backdrop of an improved economy and strong home price growth, which has reduced the need for loan modifications in recent years. HAMP monthly applications have dropped steadily and are now approximately 70% below the monthly average at the start of the program.

Fitch believes there are several implications to the end of HAMP:

--As the total number of loan modifications declines, non-HAMP 'proprietary' modifications will be used more frequently;

--More proprietary modifications will lead to less consistency of servicer modification approaches across the industry;

--Modification decision timelines will shorten, which may lead to a modest reduction in liquidation timelines.

HAMP has been successful in providing payment relief to borrowers that have not been able to enter into traditional refinancing because they are underwater on their loans and are experiencing payment difficulties. Proprietary loan modifications also offer relief and in general require less documentation than the HAMP programs. Borrowers applying for modifications in 2017 may find greater ease in the documentation gathering process and faster approval/decline decisions. However, features of proprietary modifications differ across servicers and this can be further impacted by approaches taken by the investors in the loans.

The HAMP program provided for the unification of loss mitigation policies across the broad mortgage servicing industry. HAMP's approach of using a three-month trial period with a roll to permanent modification has been widely adopted across the industry and is also used for proprietary modification programs. However, the parameters of proprietary modification programs differ across mortgage servicers including varying approaches to documentation requirements and debt-to-income ratios. As proprietary modifications increase to replace HAMP, the overall variability in modifications is expected to increase.

Currently servicers first perform full reviews of applications for acceptability to HAMP guidelines; ineligible candidates are usually subsequently screened for acceptability under proprietary modification programs. The end of HAMP removes this initial step and servicers will likely be able to make faster modification decisions. This may contribute to shorter liquidation timelines for the portion of loans that do not qualify for proprietary modifications.

To be clear, the end of HAMP does not mean the end of available help to borrowers still struggling with their mortgage payments as other existing programs remain available. In practice many servicers and in particular servicers of PLS have found success through the use of their own proprietary loan modification programs. Also, with a further HAMP extension unlikely, the GSE's are expected to be focused on other borrower relief programs.