According to ‘Dealing with Household Debt,’ published in the April edition of the IMF's World Economic Outlook, HAMP got off on the wrong foot due to ‘limited incentives for the parties to participate in the program and tight eligibility criteria for borrowers have resulted in low take-up.’ As a result, many creditors had no reason to embrace the program, and servicers had ‘little incentive to initiate a costly renegotiation process, given that they are already compensated for some [legal] costs when delinquent loans enter foreclosure.’
The IMF notes that many lenders chose to prefer forbearance and foreclosure, since HAMP borrowers showed a ‘high probability’ of defaulting despite receiving a loan modification.
‘Securitization presents additional coordination and legal problems,’ the IMF adds. ‘In addition, conflicts of interest may arise, for example, when second-lien holders forestall debt restructuring.’
The IMF was skeptical that enhancements to HAMP have helped improve the program, pointing out that the absence of Fannie Mae's and Freddie Mac's participation in HAMP has complicated matters further. The organization also questions whether HAMP's focus has been accurate.
‘Importantly, the modifications focus on bringing a narrow definition of the mortgage repayment burden down to 31 percent of monthly gross income rather than the total repayment burden (including other installment loans and second mortgages),’ says the IMF. ‘As a result, most borrowers remain seriously constrained even after the modifications, with after-modification total debt repayment burdens averaging 60 percent of monthly gross income and the after-modification loan-to-value ratio sometimes actually increasing. This helps explain the high redefault rate on the modified loans, which currently averages 27 percent after 18 months and as high as 41 percent in cases where the monthly payment reduction was less than or equal to 20 percent.’
For its part, the IMF weighed in favor of principal reductions to hep struggling homeowners.
"Principal reductions are likely to reduce foreclosure rates and, if implemented on a large scale, would support house prices substantially – helping to eliminate the overall uncertainty weighing on the housing market via the shadow inventory," says the IMF.