The most recent Home Affordable Modification Program (HAMP) report released by the U.S. Treasury shows extremely low conversion rates"" from trial to permanent modifications, with success just a 50/50 gamble, according to commentary from ""Moody's Investors Service
As of the end of April, servicers participating in HAMP had converted almost 300,000 permanent modifications. However, they had also canceled 277,640 trial modifications. Moody's says this represents approximately a 50 percent success rate. The report also shows 3,744 permanent modifications have been canceled.
According to Moody's, the biggest culprits keeping conversions low are insufficient paperwork and negative equity.
""We believe the low conversion rate is a combination of two issues: borrowers failed to provide the documents they promised, and the rate reduction and principal forbearance used under HAMP were not enough to motivate severely underwater borrowers to start paying again,"" Moody's analysts wrote in their report.
The ratings agency says it expects recently announced program changes to produce higher conversion rates by allowing principal forgiveness. However this piece of the new HAMP directives are not expected to be ready for implementation before fall.
Moody's notes that the lion's share of HAMP modifications, 56 percent, has been on GSE-held loans, as expected. However, more than a third, 35 percent, occurred in the non-GSE or ""private-label"" sector.
""If servicers can increase modifications in the private-label sector and extend principal forgiveness under HAMP 2.0, default rates for mortgage loans backing private-label securities can be reduced significantly,"" the analysts at Moody's said.
""So far we assume that modifications will lower losses on pools backing private-label securities by approximately 5 percent,"" they wrote in the report.