The government program to stem the rising tide of foreclosures has gotten off to a slow start for sure, but there's hope yet that the Home Affordable Modification Program (HAMP) will catch fire and may even stem "strategic defaults."

To date, HAMP has helped only 300,000 struggling homeowners using permanent loan modifications. Another 637,000 borrowers are in payment trials, hoping to get a permanent modification.

Forecasters at Moody's expect HAMP will be more successful going forward-particularly as servicers transition from straight interest rate/term modifications to principal reductions on first and second mortgages as a way to prevent strategic defaults.

Over a three-year period starting in June 2009, Moody's expects HAMP restructurings to help 1 million to 1.5 million homeowners stay in their homes without a redefault.

Celia Chen, a Moody's senior director, said principal reduction is "really going to help borrowers avoid strategic defaults and encourage them to stay current on their payments." In addition, the improving economy and job market also will dampen the redefault rate, she believes.

Last week, the Treasury Department reported that HAMP servicers completed 68,300 permanent modifications in April, compared to 60,600 in the previous month. Treasury says another 97,000 permanent modifications are pending, with borrowers waiting to sign the final paperwork.

HAMP is clearly up and running but it hasn't been smooth sailing. Over the past several months, Treasury has pressured servicers to expedite the approval process, a move that has resulted in unqualified homeowners being dramatically forced out of the payment trials.

Overall, 277,640 borrowers have dropped out of the HAMP payment trials, including 122,170 in April. Herb Allison, Treasury assistant secretary for financial stability, noted that many of the trials were started based on the borrower's "stated income." But participating servicers could not verify that income, which means a permanent modification could not move forward.

HAMP servicers now require borrowers to verify their income upfront before starting the three-month payment trials. "We expect a much lower rate of cancellations going forward," Allison said.
The Association of Mortgage Investors (AMI) noted that the number of homeowners that have failed a trial modification is nearly as large as the 295,350 active permanent modifications. AMI is critical of HAMP's reliance on interest rate and term modifications. It supports Treasury's new emphasis on principal reductions.

Meanwhile, Moody's Chief Economist Mark Zandi expects to see an increase in distressed sales in the second half of the year, which will put downward pressure on home prices.

Roughly 4.3 million first mortgages are 90 days or more past due, which means the loans are likely headed into default, Zandi said. "The administration and servicers are trying to forestall these defaulted loans from making their way to the market," he said. "And they will succeed to some degree," he said. 

Nevertheless, the number of problem loans going into foreclosure or short sales will increase in the second half of this year, Zandi predicted. expects 1.89 million foreclosures and short sales this year, down slightly from 1.97 million in 2009. At the same time, the number of nondistressed sales will weaken with the expiration of the homebuyer tax credit.

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