Mortgage Mods Doomed by Back End Debt


Much like America's waistlines, the Treasury Department's monthly reporton the Home Affordable Modification Program continues to grow.

What started as a four-page report has now reached ten pages, with the latest addition to the "lender accountability" category: Conversion Rate and Aged Trials as Share of Active Trials.

Don't get me wrong, these provide a lot of insight into why so many borrowers are not getting permanent modifications. The top four lenders (Bank of America, JP Morgan Chase, Wells Fargo and CitiMortgage) take up the bulk of the bottom slots on the Conversion Rate chart. All four convert less than 26 percent of trial mods to permanent mods.

While most don't want to go on the record with me, lest they rile the regulators, Bank of America's Rick Simon says initially, "All the major banks, at Treasury's suggestion, went to non-verified income for verification."

That seems to be the crux of the problem.

Imagine that: Folks who didn't have to show any proof of anything to get a trial modification, weren't able to sustain that modification. The big guys have now changed that, requiring full documentation. So big surprise the report now shows a drop in the number of new modifications, because if you have to get all that documentation up front, then it's likely going to take longer.

So now we get the delay, but why are the permanent mods failing at all if they've barely begun, and if the front-end debt to income formula is supposedly so perfect? I asked the banking folks and expected to hear "unemployment" as the answer.

I was wrong. They cite the back-end DTI, which is your mortgage debt in addition to all your other debt, like car, credit cards, etc.

P. 5 of the HAMP report puts that at 64.3 percent, meaning you've got 35.7 percent of your income to spend once you've paid all debt-related bills—not to mention your income taxes! Last month it was 61.3 percent, the month before, 59.8 percent, so it's getting progressively worse. In the fine print under the chart, it says "Borrowers who have a back-end debt-to-income ratio of greater than 55 percent are required to seek housing counseling under program guidelines."

Okay, so you would think those would be the riskiest borrowers.

So how is it that the "Median Characteristics of Permanent Modifications", which is the title of the chart, shows the back end DTI (64.3 percent) at a level that would require counseling? i.e. risky??

And that's the "Median", which by definition means half the permanent mod borrowers have and even HIGHER back end DTI.

"A 64.3% DTI is so far out of scope with the pre-bubble years safe and sound 36% total DTI — and even typical bubble-years full-doc DTI's of 50% — it is absolutely irresponsible," says mortgage analyst Mark Hanson. "Servicers are pushing the envelope with respect to getting people to qualify," he adds.

I have to wonder if any mortgage originator today would even offer a new loan to anyone with those kinds of stats. My guess is no.


Questions? Comments?