The U.S. Treasury has provided guidance for further changes to the Home Affordable Mortgage Modification Program (HAMP) that will incentivize government-sponsored entities to reduce principal on troubled home loans by paying an increased amount to those lenders for the reductions. The anticipated surge in participation from Freddie Mac and Fannie Mae is expected to benefit the mortgage insurance industry by as much as $4 billion. Banks are also expected to make money on the deal, although the government has exempted JPMorgan Chase and Bank of America from the incentive program until the two banks make more significant changes to mortgage modification efforts. For more on this continue reading the following article from TheStreet.
The U.S. Treasury Department’s latest changes to the mortgage modification program will deliver significant benefits to mortgage insurers, according to analysts at FBR Capital Markets.
“[Treasury’s] release on Friday points towards attaining greater GSE participation, particularly given higher incentives for modifications that include principal reduction. Recall: GSE modification is not a claimable event for MIs, so greater participation from GSEs [should] lead to more delinquent borrowers becoming current and lower incidences of loss for MIs,” said Steve Stelmach and Edward Mills wrote in a report.
On Friday, the Treasury Department released an updated guidance for the Home Affordable Mortgage Modification Program (HAMP), extending the program by another year to the end of 2013 and targeting an increase in principal reductions.
The government will now triple the incentives paid to servicers who reduce principal. Servicers will be paid between 30 cents to 63 cents for every $1 of reduced principal on early-stage delinquent loans compared to 10 cents to 21 cents earlier. For loans that are more than 6 months delinquent, the compensation has been increased to 18 cents from 6 cents earlier.
More importantly, the revised program will also pay Fannie Mae(FNMA) and Freddie Mac(FMCC) incentives to reduce the principal on loans.
Greater participation from Fannie Mae and Freddie Mac in principal reductions could deliver a $4 billion benefit to the mortgage insurance industry, according to the analysts assuming the latest program is atleast as successful as the earlier version.
The analysts point out that loan forgiveness benefits mortgage insurers in one of two ways. They could either completely avoid a claim or at the very least it could also lower the claimable amount, as insurance now applies to the newly modified loan amount, not the original loan value.
MGIC Investment(MTG) and Radian Group(RDN) may be among the companies that benefit. Shares of Radian were up nearly 2% after being down by more than 5% earlier in the session on Monday. Shares of MGIC were also rebounding, down about 1% after declining nearly 6% earlier in the session.
Bank of America(BAC), JPMorgan Chase(JPM), Wells Fargo(WFC) as well as servicers including Ocwen Financial(OCN) stand to benefit from better incentives.
However, the Treasury has withheld incentives to Bank of America and JPMorgan, saying that the banks have to significantly improve their modification efforts under HAMP.
The earlier version of the mortgage modification program has had only moderate success. Since 2009, HAMP has completed approximately 900,000 permanent modifications, most of which has involved a combination of reducing principal payments and lengthening the term of payment. That falls short of the original target of 4 million borrowers.
The “Principal Reduction Alternative” (PRA) has started approximately 38,000 permanent modifications for an average principal reduction of $66,000.
The government-sponsored agencies have so far balked at reducing principal on loans, a major shortcoming for HAMP. The Federal Housing Finance Agency recently released an analysis that concluded that it would cost Fannie Mae and Freddie Mac $100 billion to reduce principal on the 3 million underwater homes that they currently guarantee.
GSE participation in the new program is subject to the FHFA’s approval. FHFA director Edward DeMarco said in a written statement that the agency would analyze the impact of the newly announced incentives on their estimates.
Other changes include extending HAMP to investor-owned properties as well as requiring servicers to consider second liens and other debt in estimating debt-to-income ratios. Only borrowers with a debt to income of more than 31% are considered eligible under the program.
The government has been pushing for greater principal reductions. Reducing principal on underwater homes, proponents argue, has the effect of providing both relief to homeowners as well as enabling successful refinancing. It also encourages labor mobility, as unemployed workers with underwater homes can more easily sell their homes and relocate to areas where there are more employment opportunities.
The big banks run their own mortgage modification programs besides offering modifications through the government.
JPMorgan has offered 1.2 million mortgage modifications and completed 452,000 since 2009. Bank of America has said more than 1 million modifications of first and second lien mortgages have been completed since 2008, of which 78 percent were completed using Bank of America proprietary programs, and the remainder were completed through the federal government’s programs.
This article was republished with permission from TheStreet.