The Home Affordable Modification Program and other initiatives use a net-present value test to determine if a modification benefits the investor more than a foreclosure. If the test fails when the mortgage is reduced to a 31% debt-to-income ratio under HAMP, the borrower is denied a mod. Other programs have different thresholds.
But the CRL studied more than 1,500 net-present value tests and found more modifications ended up benefiting investors than actually went through. Setting a redefault rate on these loans as high as 79% – which is roughly double the rate reported by the Office of the Comptroller of the Currency – payment reductions of up to 20% would still benefit an investor more than a foreclosure.
Modifications still outnumbered foreclosures at the largest banks. In the third quarter, the were 382,000 foreclosures, compared to 470,000 trial or permanent modifications granted, according to the latest data from the OCC. However, another 1.2 million homes are in the foreclosure process.
Even the Treasury Department, long criticized for being soft on servicers, will put in place NPV test checks this year that will allow borrowers to contest results.
Bill Frey, president of Greenwich Financial Services, acknowledged the same problems the Federal Housing Finance Agency did when the regulator set out to change servicing fees in January.
“The misalignment of economic interests between the owners of mortgages and those who service them is the single reason why the mortgage problem has become a crisis and a massive economic drain on this country,” Frey said.