What Is Causing High Rate of Failure for Loan Modifications?

When the Home Affordable Modification Program first cranked up lenders were allowing temporary modifications to be put in place with only stated income information. The big four—Bank of America, Chase, Wells Fargo and CitiMortgage—were all allowing this partial information in approving the initial round of temporary loan modifications, apparently at the request of the Treasury Department in order to speed the process. Now all four convert less than 26% to permanent loan modifications.

This lack of full documentation issue was changed several months ago when new guidelines came out for the HAMP program, and, predictably, the number of loan modifications is dropping because it is taking longer to pull the documentation together, and some simply can’t provide the necessary verification.

Analysts have identified other problems with the loan modification program which appears to be keeping the failure rates high. Some expected that problem would be unemployment, but it turns out instead, the big culprit is the back end debt to income ratio that is used in determining whether to accept a loan modification. The riskier debt to income cases (over 55% of back end debt to income) are sent to counseling before being approved to try to get other debt obligations under control. However, the average loan modification is still approved with a median of 64.3% debt to income for mortgage, car payments, credit card debt, etc. The number seems to be getting worse each month the HAMP report comes out. Two months ago the HAMP DTI average was 59.8%. This creeping debt ratio is threatening to doom the current crop of loan modifications.

Many conclude that the rules regarding existing debt will have to be tightened in order to assure a better success rate with loan modifications.