New guidelines under the Home Affordability Modification Program (HAMP) will allow permanent loan modifications wherein borrowers pay a median of 55% of their income to service debts such as mortgages, car payments, credit card debts, and the like. This is called the back-end debt ratio. In normal markets, the maximum back-end debt ratio is 40%.
The stats are published here and the relevant chart is attached. (The link changes as they update the report, so the link may not show the same figures quoted here. The previous month’s chart actually showed the median back-end debt service ratio was 60%!)
The so-called “permanent modifications” are supposed to help homeowners on the brink of foreclosure adjust their mortgages to manageable levels. But the market has long recognized 40% as the maximum manageable level of back-end debt service. And the newly released figures show that the median back end debt service ratio is 55%–meaning that fully half of all “permanent” modifications require borrowers to pay more than 55% of their income to service debt.
Think about that for a second. That’s 55% of your gross income–it’s not even after tax. The borrowers in this program are almost guaranteed to re-default, making this program anything but “permanent.”
John Burns, a homebuilding market analyst based in California, has some strong words for the program:
It is very obvious that the architects of HAMP are short-term focused, and are tricking us into thinking they are solving the problem by calling these permanent modifications. Until these loans are renamed, let’s call them “Liar Loans 2,” except this time the liar is the Bank of the United States rather than the Borrower because this modification is anything but “permanent”. We do believe that stabilizing home prices and the banking system are critical to the recovery of the U.S. economy, but let’s at least tell the truth about what is being done.
What this means for you is that the housing recovery that is being touted by elected officials is far from assured. There will be fewer homeowners thrown out on the street this month than would have occurred otherwise, but they will be tossed out later.
Through December 2009 (the lastest figures in the report), there had been 1,164,507 trial modifications and 112,501 permanent modifications–under 10 percent. Just over 3,000 were in Illinois.