This page is no longer maintained. As of early 2011 it was fairly clear that mortgage modifications, though providing some overall positive effect, were not a game changer for the foreclosure crisis.

Large scale mortgage modification


8 Mar 2011.

Since the housing crisis began in 2007 there have been a number of ambitious modification programs meant to help with the wave of foreclosures. There has been some positive effect, but the number of modifications has remained small compared the millions of distressed loans. Further, a large fraction of modifications re-default, and in those cases modification serves only to delay the inevitable.

All told, home forfeitures are likely to remain elevated for several years.


(Clippings below covered through 8 Dec 2009)

Fannie and Freddie delinquencies, mods and foreclosures (8 Mar 2011) The two key facts are (1) serious delinquencies (90+ days delinquent or in foreclosure) have been dropping for 3 quarters, but (2) they remain very high and will take years to return to a normal level.

Fannie Mae and Freddie Mac, in their role as quasi-governmental agencies, have been under pressure throughout the crisis to increase foreclosure mitigation efforts, in particular loan modifications. Both enterprises have instituted a number of programs and both play a major role in Making Home Affordable, announced in Feb 2009. Nevertheless, modifications are still small in number compared to the backlog of problem loans.

HAMP progress (7 Mar 2011) Short term effect on liquidations: HAMP's biggest effect so far has been to temporarily slow foreclosures, due to a freeze imposed on all loans in trial modifications. But the net increase of 6 thousand loans so protected in January is small compared to about 75 thousand monthly foreclosure sales.

Short term effect on delinquencies: HAMP is currently helping to decrease the backlog of seriously delinquent loans: As trial modifications successfully convert to permanent, delinquent loans are recorded as “curing” to current. However the number of active permanent modifications went up by only 17,000 in January, which is almost insignificant in the face of millions of seriously delinquent loans.

Long term effect on foreclosures: For now it would appear that the number of modifications might reach about 600 thousand. Something like half will eventually re-default, leaving perhaps 300 thousand genuine successes. That is a small fraction of the millions of loans now seriously delinquent or in the foreclosure process. (Background on HAMP.)

Hope Now program (16 Nov 2009) Hope Now is (according to their website “an alliance between HUD approved counseling agents, mortgage companies, investors and other mortgage market participants that provides free foreclosure prevention assistance.” It is a private sector alliance, whose formation was encouraged by HUD and Treasury. In addition to free counseling, the alliance has agreed on guidelines for workouts.

Hope now also extrapolates from their members' numbers to provide industry-wide estimates of progress on foreclosure mitigation via workouts. These data are freely available on the Hope Now website, but may not be reproduced here. Suffice it to say that the results are similar to those in public sources.

MHA program background (13 Nov 2009) Making Home Affordable is the Obama administration's plan, administered by the Treasury, to reduce foreclosures. The key components are:

  • HAMP – Home Affordable Modification Plan. The primary goal of this plan is to reduce the payments of borrowers with proven hardship to at most 31% of income through a combination of interest rate reduction, term extension, and payment deferral.
  • HARP – Home Affordable Refinance Plan. This is a plan for Fannie Mae and Freddie Mac to refinance their existing loans at lower rates for borrowers who are current. The key provision is that underwater homeowners may qualify: LTV can be up to 125% and there is no limit on CLTV.
  • 2MP – Second Lien Modification Plan. In this plan Treasury will pay incentives and share costs, under certain conditions, for modifying second liens in connection with primary loan modifications. Alternatively, partial payoff for second lien extinguishment is offered.

MHA is a solid attempt to address shortcomings of earlier plans and make a significant difference in the foreclosure crisis. For borrowers, there are explicit goals to qualify underwater cases and reduce the monthly payment to an affordable level. For servicers and lenders, cost-sharing and cash incentives are provided. For second lien holders, incentives and cash-out provisions help motivate cooperation. And a standardized approach to the NPV of a modification may reduce securitization issues. Probably the single biggest caveat is that underwater borrowers will remain underwater, perhaps still leading to numerous defaults.

The plan introduces significant distortions in standard metrics that will make it difficult for some time to evaluate the outcome: during the application and trial periods for HAMP, the delinquency status of the loan is unchanged and any foreclosure actions are put on hold.

Mortgage loan servicer role in attempting to slow default rate (16 Nov 2009) During the crisis loan servicing organizations have often been pressured to do more loan modifications. However servicing is a low margin business; both budget and staff expertise are serious limitations when going beyond the routine, in particular for modification decisions.

Mortgage Metrics report (30 Dec 2010) The number of Modifications completed per quarter – 234 thousand in Q3 – remains small in comparison to the backlog of distressed loans – 3.1 million loans that were either 60+ days delinquent, delinquent and in bankruptcy, or in the foreclosure process. In addition, between a third and half of all modifications will eventually re-default. There will be many more home forfeitures.

The Mortgage Metrics report covers about 2/3 of the market. Scaling up suggests the wider backlog of distressed loans is on the order of 4.8 million.


  • NPV (21 Nov 2009) The modification decision is normally phrased in terms of Net Present Value (NPV) of the loan. Most commonly, foreclosure is compared to a modified and hence cured loan. This is incorrect, as some loans would have self-cured anyway, and some modified loans will redefault. Even with self-cures and modified loans taken into account, NPV calculations will probably often indicate modification is called for, but it may be that fear of missing a self-cure and fear of redefault may explain some of the reluctance to modify.
  • Short sales (20 Nov 2009) Although short_sales are attractive in principle, in practice they turn out to be relatively uncommon. See the 17 Apr 2008 entry (below) for some of the reasons why and the Mortgage Metrics report page for more information on frequency.
  • Wilbur Ross says principle reductions help (3 Apr 2009) Ross' servicing company, American Home Mortgage Servicing, pursues “aggressive” principle reductions and only has a 20% re-default (undefined) rate. Ross points out that the $75 billion in Obama's plan works out to about $8 thousand per borrower-in-need; probably not enough to make a difference.

See also

Below are clippings used in constructing this page

Supreme court ruling on state vs federal regulation

18 Apr 2007. FT p1.

“Regulators told banks they would 'not face regulatory penalties' if they offered borrowers new terms. The Supreme Court ruled 5-3 that banks regulated by the federal Office of the Comptroller of the Currency had a broad shield from additional state regulation. Though it did not directly involve subprime lending, it could have a big impact on the ability of states to act independently on predatory lending and throws the spotlight on federal authorities.”

Short sale overview

17 Apr 2008. WSJEE pD1.

“Why Lenders Are Leery Of Short Sales. Ruth Simon and James R. Hagerty”

“Short sales … typically result in losses of 19% of the loan amount, compared with an average loss of 40% for homes that are sold after foreclosure, according to a recent analysis by Clayton Holdings Inc., which tracks more than $500 billion in mortgage loans monthly for investors. … the number of short sales is edging upward. Short sales currently account for about 18% of home sales, according to the National Association of Realtors. … a short sale requires the approval of not only the buyer and the seller, but also the mortgage-servicing company. In many cases, loans have been packaged into securities – which means that the mortgage servicer must consider the interests of the investors who own the loans. … Molly Kay Hamrick, president of Coldwell Banker Premier Realty in Las Vegas, estimates that 20% of short-sale offers in the area lead to completed sales, compared with 85% for more traditional sales. Redfin, an online real-estate brokerage based in Seattle, says it represented buyers on 65 short-sale offers in the first quarter but expects only two or three to result in a completed sale. … Servicers take an average of 4 1/2 weeks to provide an answer on a potential short sale, according to a recent survey of real-estate agents by Campbell Communications, with some taking two months or more to respond. By contrast, it takes an average of less than two weeks to get a response to an offer for a property that has been foreclosed on, the survey found. … Mortgage companies say they prefer other means to help borrowers, such as a repayment plan or loan modification. Gathering all the information needed to evaluate a short-sale offer can take time, says Patrick Carey, an executive vice president with Wells Fargo. The loan servicer must first determine whether the homeowner really can't continue meeting the loan payments, then get an appraisal or broker's opinion of the home's value. Mortgage servicers also try to ensure that the proposed sale is an “arm's length” transaction between two parties rather than, say, a sale to a relative on sweet terms. They must also determine whether the buyer has sufficient funds or the ability to get a loan. If all those hurdles are cleared, the servicer may still need to get approval from the investor that owns the loan and provide an analysis showing that the investor will be better off with a short sale than with another solution. There are additional complications if the borrower has a mortgage and a home-equity loan. In that case, both parties must approve the deal – which is a challenge when the sales price may not even be enough to cover the mortgage balance. … Fannie Mae and Freddie Mac, which own or guarantee nearly half of all outstanding U.S. mortgages, both say they are trying to streamline the short-sale process. Fannie Mae says that it plans to introduce a policy in the next few months under which real-estate brokers would be given an advance indication of the approximate minimum price that would be acceptable in a short sale, a move designed to quickly weed out offers that are too low. Freddie Mac says it has already given its top servicers more flexibility to accept short sales for homes backed by loans it guarantees or owns. Lehman Brothers Holdings Inc., another issuer of mortgage-backed securities, also is offering incentives in some cases for servicers to arrange short sales or loan modifications.”

American Home gets much better results on loan mods by reducing principal

19 Feb 2009. Housing Wire.

“Wilbur Ross: Obama Foreclosure Fix Not Enough. By PAUL JACKSON and TERI BUHL”

“Distressed asset investor Wilbur Ross, of WL Ross & Co., told HousingWire that by his estimate, risky mortgage lending practices have to-date placed around $2.4 trillion of American homes underwater and at a subsequent risk of foreclosure.

Obama’s plan earmarks $75 billion to reach an estimated 9 million homeowners over five years. That’s $8,000 per borrower, broken down to $1,600 a year, to offset the cost of mortgage modification. Ross told CNBC’s Squawk Box this morning, “Does anyone really think that all that keeps 9 million people from losing their homes is $1,600 per year? I don’t think so.“

Ross has plenty of skin in the mortgage servicing game, as he owns Irving, Tex.-based American Home Mortgage Servicing, Inc., which recently became the nation’s largest third-party servicer … Last week, Ross told HousingWire in an interview that he thinks the best way to motivate lenders, servicers, and homeowners work together on modifications requires far more than what’s been proposed so far. In particular, he believes that what’s needed is aggressive principal modifications for borrowers most in need. He has said that his American Home servicing shop has seen six-month recidivism rates below 20 percent — compared to the 50 or 60 percent standard in the industry — because the servicer has been aggressively looking to cut principal balances. … The Homeowner Affordability and Stability Plan … doesn’t go far enough, Ross suggested. “The have to reduce the principal amount of loan, not just nonperforming loans, but also performing ones,” he told CNBC. “Why should a guy who’s not paying benefit, while some poor citizen who’s struggling to make the payments gets stuck with the mortgage?””

Self-cures and redefaults make loan mods less attractive

6 Jul 2009. Boston Fed Public Policy Discussion Paper.

“Why Don’t Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures, and Securitization. Manuel Adelino, Kristopher Gerardi, and Paul S. Willen”

“we explore the renegotiation of home mortgages using a dataset from Lender Processing Services (LPS), a large, detailed sample of residential mortgages. …

why lenders do not renegotiate with delinquent borrowers more often? We argue for a very mundane explanation: lenders expect to recover more from foreclosure than from a modified loan. This may seem surprising, given the large losses lenders typically incur in foreclosure, which include both the difference between the value of the loan and the collateral, and the substantial legal expenses associated with the conveyance. The problem is that renegotiation exposes lenders to two types of risks that can dramatically increase its cost. The first is what we will call “self-cure” risk. As we mentioned above, more than 30 percent of seriously delinquent borrowers “cure” without receiving a modification; if taken at face value, this means that, in expectation, 30 percent of the money spent on a given modification is wasted. The second cost comes from borrowers who redefault; our results show that a large fraction of borrowers who receive modifications end up back in serious delinquency within six months. For them, the lender has simply postponed foreclosure; in a world with rapidly falling house prices, the lender will now recover even less in foreclosure. In addition, a borrower who faces a high likelihood of eventually losing the home will do little or nothing to maintain the house or may even contribute to its deterioration, again reducing the expected recovery by the lender. …

one cannot evaluate a modification by simply comparing the reduction in the interest rate on the loan or in the principal balance with the expected loss in foreclosure. One must take into account both the redefault and the self-cure risks, something that most proponents of modification fail to do.”

Even with re-default and self-cure NPV can indicate modification

16 Jul 2009. Credit Slips.

“Is Redefault Risk Preventing Mortgage Loan Mods? by Adam Levitin”

“One of the very strange things about [the Boston Fed] study is that it has some empirical data and a model, but it never puts the two together. Instead, the study assumes that the empirical data and the model support the interpretation advanced simply because the model indicates that high levels of redefaults and self-cures would make modifications no longer worthwhile, and the numbers of redefaults and self-cures look really large. But just because a number looks large doesn't mean that it necessarily shifts the modification calculus. I've tried putting the numbers together with a model. Bear with me on the math–it's entirely possible that I've overlooked something in my calculations, and if I have please comment to let me know–but if my math is right, then redefault/self-cure risk just isn't what's limiting mods.

The question a rational mortgagee with no outside interests should ask when faced witha defaulted loan is whether the net present value (NPV) of a modified loan is greater than the NPV of a unmodified loan.”

[But surely CYA is at least as big a factor as NPV. Perhaps this is why HAMP provides a standardized NPV calculation.]

Modification without principle forgiveness may be destined to fail

8 Dec 2009. Congressional testimony.

“Testimony of Laurie S. Goodman”

  • The housing market is fundamentally in very bad shape. The single largest problem is negative equity.
  • The current modification program does not address negative equity, and is therefore destined to fail. …

7.9 million homeowners did not pay their mortgage in Q3 … we estimate that approximately 7 million of these 7.9 million homeowners will be forced into vacating their properties. And this estimate of 7 million units includes only the borrowers that have already stopped making their payments. …

At Amherst we did a study looking at all prime borrowers who were 30 days delinquent on their mortgage 6 months ago. We sorted these mortgages by the amount of equity the borrower had in their home. We then came back 6 months later, and looked at whether the borrower was at least 60 days delinquent. For prime borrowers with 20% equity, only 38% had become 60+ days delinquent. For prime borrowers with substantial negative equity (a combined Loan-to-value ratio of 141-150) 75% had become 60+ days delinquent. …

Negative equity is the most important predictor of default. When the borrower has negative equity, unemployment acts as one of many possible catalysts, increasing the probability of default. …

the OCC/OTS reports that in Q2, 30.5% of mortgage loans in bank portfolios received a principal reduction as part of he modification. The corresponding number was zero for Fannie, Freddie, Government guaranteed and private mortgages. Thus, when the same party owns the first mortgage, the second mortgage, and the servicing, they look to maximize the net present value of the loan and often choose to do principal reduction. It is important to note that modification on mortgage loans in bank portfolios have a much lower re-default rate than other types of loans.”