The administration released new numbers Friday on its principal foreclosure prevention initiative, the Home Affordable Modification Program (HAMP). Housing analysts and market observers say the results are disappointing at best.

The latest performance report shows that nearly half of the homeowners approved for trial modifications have fallen out of the program. As of the end of July, 616,839 HAMP trials have been cancelled, out of the 1,307,489 trials started since the program began.

Assistant Treasury Secretary Herb Allison says servicers have been working through a backlog of aged trials from when servicers were accepting borrowers into the program without verifying income and other critical requirements.

He said decisions on remaining aged trials – whether to convert to a permanent modification or drop the borrower from the program – will be made over the next couple of months. There are currently 255,934 HAMP trials classified as “active.”

Servicers have also canceled 12,640 permanent HAMP mods because the borrower has missed three or more consecutive monthly payments. Another 272 permanents have been closed because the borrower was able to pay off their loan.

During the month of July, servicers converted just 36,695 HAMP restructurings to permanent status, bringing the total number of active permanent mods to 421,804. That’s up 11 percent from 389,198 the month before, but the monthly conversions are showing a significant slow-down, considering growth in permanent modifications averaged more than 50,000 a month throughout the first half of this year.

On a call with reporters, federal officials touted the government’s foreclosure prevention program as showing “progress” and “shaping a market of greater stability.” The past continues to be their benchmark of choice, rather than the present and the sheer volume of Americans who are today struggling to meet their mortgage obligations in the midst of a still-faltering economy.

Recent estimates from the industry alliance HOPE NOW show that there are currently nearly 4 million homeowners 60 or more days behind on their mortgage.

HUD Assistant Secretary Raphael Bostic repeatedly told media on the call, “Let’s be clear, when this administration took office, the housing market was in freefall. Over the last 18 months, that freefall has been stemmed.” To his credit, Bostic was quick to add, “I’m not saying we’re out of woods or there’s no difficult times ahead…. There are still rough patches out there … and we will remain vigilant.”

Allison also pointed out that half of the homeowners who have been booted from HAMP are receiving other assistance or have become current. Nearly 10 percent of those whose HAMP trials were cancelled have been pushed through to foreclosure, while 46 percent have received an alternative modification from their servicer.

Servicers are apparently saving more homes with their own proprietary mod plans than through the government program. HOPE NOW reports that the industry completed 975,000 permanent loan modifications during the first half of 2010. Two-thirds of those were processed through servicers’ own mod programs; one-third have been HAMP modifications.

I came across this article in me reading this morning. Obviously I have no idea how this will play out because its more of a political issue than a financial one, but I couldn’t but think how nice it would be to be able to buy some of all those loans.

-Trent

And now the article…..

About 50 percent of the loans held by Fannie Mae and Freddie Mac come from the nation’s four largest banks – Bank of America, JPMorgan Chase, Wells Fargo, and Citi.

Lately, the GSEs have become more aggressive in forcing originators to buy back bad loans. Based on Fannie and Freddie’s current “distressed” numbers (a combined $354 billion in delinquent mortgages and REOs), Fitch Ratings estimates that the big four could be on the hook to repurchase as much as $180 billion in nonperforming assets. This, of course, would be the worst-case scenario.

The ratings agency said, “Fitch anticipates that a focal point of repurchase requests will be reduced documentation loans (sometimes known as Alt-A loans). The actual amount of repurchase requests will ultimately depend on key variables such as quality of the originator’s underwriting, documentation standards, and foreclosure rates.”

In Fitch’s worst-case scenario, the buybacks could result in a combined loss for the nation’s top four lenders of between $17 billion and $42 billion. The agency notes, though, that realized losses could be lowered, dependent on the banks’ ability to cure loan deficiencies.

Fitch says historically, purchasers of mortgages or mortgage-backed securities (MBS), such as Fannie and Freddie, have been “fairly judicious” in pursuing originators to buy back troubled loans or foreclosed properties.

Prior to the beginning of the mortgage crisis, the ratings agency explained, losses were very manageable and the housing GSEs used to compete actively against one another to gain market share from the major bank originators. As a result, they likely weighed the costs and benefits of exercising their repurchase rights against originators with whom they had maintained long-standing relationships.

That stance, though, has changed now. To some extent, this is expected given the significantly larger volume of troubled mortgages sitting on the GSE’s books, Fitch says. And major banks have acknowledged this development and have increased their reserves to cover an increase in requests for deficient loan repurchases.

Based on data through the second quarter of 2010, Fitch estimates the four largest U.S. banks have received pending repurchase requests totaling $19.1 billion, with $10.7 billion coming directly from the GSEs. To date, the big four have set aside $8.3 billion in buyback reserves, according to the ratings agency.

Fitch says it is undertaking a review to assess whether these increased reserves are just a part of the flood of current troubled mortgages or whether investors, such as the GSEs, have expanded their interpretation of what constitutes a mortgage that would be eligible for repurchase under existing warranties.

“This concern…is not isolated to only the four largest banks. Any bank or other entity that has been actively engaged in mortgage lending could feel the impact,” Fitch said in its report.

Nearly a quarter of U.S. homeowners with a mortgage owe more on the loan than their home is worth, and home prices are threatening to fall further and push even more borrowers underwater. The Federal Housing Administration (FHA), though, is throwing out a lifeline.

Starting September 7, the federal agency will offer new FHA-insured mortgages to certain underwater, non-FHA borrowers who are current on their mortgage payments and whose lenders agree to write off at least 10 percent of the unpaid principal balance.

Editor’s comment: If my house is worth $350K and I owe $500K, how is this going to help me? It’ll save me $50K, but I’ll still be underwater by another $100K and if I short sale the house, I’ll be free of the debt and able to buy another house in just two years. I couldn’t pay down $100K of debt in two years in my wildest dreams.

This last part could prove to be the caveat that leads the new FHA refi program down the same road as the federal government’s other housing programs – a road of below par results and public criticism.

Lenders are fantastically reluctant to write down mortgage principals. It would mean either they or their mortgage investors would have to eat the amount of debt that’s forgiven, and it could set a precedent that a loan contract is not a contract at all if the terms spelled out in black and white can be changed based on market nuances, such as a slump in real estate values.

Editor’s comment: this is why I don’t think the lenders will want to give any write down. It sets a bad precedent for a loan contract.

The FHA refi program for underwater borrowers was originally announced in March as part of the administration’s expanded foreclosure prevention strategy. On Friday, FHA and HUD published a mortgagee letter explaining to lenders the details of the new negative equity refinancing program.

To be eligible for a new loan, the homeowner must owe more on their mortgage than their home is worth, be current on their existing mortgage, and occupy the property as their primary residence. The homeowner must qualify for the new loan under standard FHA underwriting requirements and have a credit score equal of at least 500.

Participation in the program is voluntary and requires the consent of all lien holders. The borrower’s existing first lien holder must agree to write off at least 10 percent of their unpaid principal balance to bring the borrower’s combined loan-to-value ratio to no more than 115 percent.

Editor’s comment: in other words, if you are in California, its doubtful that this program will help you at all.

In addition, the existing loan to be refinanced must not be an FHA-insured loan, and the refinanced FHA-insured first mortgage must have a loan-to-value ratio of no more than 97.75 percent.

To facilitate the refinancing of new FHA-insured loans under this program, the Treasury will provide incentives to existing second lien holders who agree to full or partial extinguishment of the liens.

Servicers planning to take part in the new program must execute a Servicer Participation Agreement (SPA) with Fannie Mae by October 3, 2010.

HUD says interested homeowners should contact their lenders to determine if they are eligible and whether the lender agrees to write down a portion of the unpaid principal.

FHA Commissioner David H. Stevens, said, “This is another tool to help overcome the negative equity problem facing many responsible homeowners who are looking to refinance into a safer, more secure mortgage product.”