Simply stated, homeowners who are "underwater" - owing more than their homes are worth - are much more likely to default than similar borrowers who do not. As currently structured, the Home Affordable Modification Program (HAMP) offers access to debt negotiation programs that can result in the reduction monthly payments. However, it does nothing to promote principal reduction. Critics, including regulators, members of Congress and mortgage bond investors are calling for that to change.

The April report on HAMP by the Congressional Oversight Panel (COP) appears to indicate that those homeowners who seek relief through HAMP may actually end up more deeply underwater than they were before they entered the program.

Of those who received a five-year mortgage modification through the program, the report found, the average borrower entered the program underwater by about 35 percent. Upon leaving the program, the average was more than 43 percent.

The reason for the increase is simple: Reductions in interest and extensions in mortgage terms are virtually the only relief offered through HAMP. They can reduce the borrower's monthly payment but do nothing to address the problem of negative equity.

This puts the sustainability of the mortgage workout plans at serious risk. "Even with more affordable payments, deeply underwater borrowers may remain tempted to strategically default or may be compelled to because core life events, such as death, divorce, disability, marriage, child birth, job loss, or job opportunities necessitate a move," the report states.

Unemployment, Negative Equity Driving Need for Mortgage Modifications

Unemployment and underemployment are the most common reasons cited on permanent loan modification requests that were granted - nearly 60 percent of the time, according to the March HAMP report prepared by the Departments of the Treasury and Housing and Urban Development. Excessive obligation was cited only 10.5 percent of the time.

More than three-quarters of all borrowers entering the HAMP program are underwater, according to the COP report. More than half had serious negative equity, where they owed 125 percent of what their homes were worth. Moreover, those figures only take into account first mortgages.

In March, the administration announced that HAMP will make underwater homeowners eligible for reductions in their mortgage principal, as well as offering temporary relief from monthly mortgage payments for the unemployed. However, the changes won't be in place for months.

"The continuing deep level of negative equity for many HAMP permanent modification recipients makes the modifications' sustainability questionable," the COP report states.

Related Resources