The Home Affordable Modification Program (HAMP) has succeeded in limiting the supply of distressed properties to hit the market and, as a result, has helped stabilize prices. That success may be short-lived.

Laurie Goodman, a senior managing director at Amherst Holdings's Amherst Securities Group, warned in a research note this week that the massive shadow inventory of homes waiting to go into foreclosure will inevitably lead to a double dip in home prices.

Three recent enhancements to the modification program — the Federal Housing Administration's (FHA) short refinancing option, a principal-reduction alternative and second-lien modifications — will not result in significant numbers of homeowners getting permanent modifications, Goodman predicted.

"If the modification programs do not succeed, the huge amount of shadow inventory will produce an inevitable double dip in home prices," Goodman wrote. "Our concern is that the programs announced so far will be less successful than hoped and home prices will begin to fall."
At some point, Goodman said, the Obama administration will be forced to make principal reductions "more mandatory."

She estimated that fewer than 35% of defaulted borrowers who apply under HAMP will get permanent loan mods that do not redefault. Worse, Goodman said, Hamp will be less successful "than old-style modifications with a similar payment reduction."

In other news about the government program, HAMP critics are blaming the U.S. Treasury for failing to take into account the massive debt of defaulted mortgage borrowers.

In a four-page letter to the Treasury Department this week, Chris Katopis, the executive director of the Association of Mortgage Investors, asserts that HAMP has largely been a "disappointment" because its default probability model failed to consider the total debt burdens, including credit cards, auto loans and second liens, of defaulted borrowers.

The trade group represents institutional investors holding a combined $300 billion of asset-backed securities at June 30.

Using a front-end debt-to-income ratio "is useless outside the given context" of a borrower's overall debt obligations, Katopis wrote.

Another massive problem with HAMP: The model considers the loan-to-value ratio of the first lien but ignores the second.

That "is a critical oversight that was a significant problem in the securitization process that created the financial crisis," he wrote. "The ongoing foreclosure crisis reflects many factors, including an underlying consumer credit crisis."

As the crisis drags on, troubled borrowers' debt loads grow. The Treasury's monthly reports show that the back-end debt-to-income ratio of the average Hamp borrower jumped to 79.9% in June before a loan modification, up from 76.1% in January. After a modification, the average borrower had a 63.7% back-end debt-to-income ratio, up from 59.7% in January.

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