Today I read through the latest HAMP performance report (pdf warning). CalculatedRisk probably has the most even-handed coverage.

The cancellation rate is way up, largely because servicers are now working off some of the never-ending “aged trials.” These never had a chance, and skew current statistics negatively. One point stood out. I think this is inexcusably misleading:

Approximately 45% of homeowners in canceled trials entered an alternative modification, based on survey data from the eight largest HAMP participants. Fewer than 2% of homeowners in canceled trials went to foreclosure sale.

There are two categories of HAMP cancellations: those that are canceled because the homeowner has no risk of default and those that will eventually be foreclosed upon. This has to do with the structure of the HAMP program. There’s no plan B for canceled trials.

For those that end the program in cancellation, all of the missed payments suddenly become due. For those that were not in trouble (one of the three leading reasons for cancellation), it is possible that they saved the difference in payments and can make them up. For those that were in trouble but were canceled for other reasons, the outlook is bleak. This is doubly true for the aged trials. It’s pretty much un-American to get a reduced mortgage payment for 6 months and save the whole meatball. More than 60% of the cancellations this month had been in trials for 6 months or longer.

Granted, the current policy is far cheaper than sticking the government with the bill, but it runs counter to the goals of an already expensive program. Unfortunately, the consequences will probably be between 6 months and a year for the majority of the cancellations (maybe longer?). This makes policy improvement unlikely. Note that the servicers are trying to stall this by offering alternative modifications, but these are usually temporary ways of mitigating the immediate impact of the missed payments. Can kicking.

There’s also this troubling bit:

Homeowners in permanent modifications are guaranteed lower payments for five years, then fixed terms at today’s low rates for the life of the loan.

The median payment decrease is 36%. But if that’s only valid for 5 years, what jump in payment will these borrowers be looking at? Just because the rate is fixed doesn’t mean that it can be afforded.

With the caveat of not knowing the payments these people face in 5 years, I have some faith that the permanent modifications made in June are more likely to be successful in the long term. 520,814 trials were canceled, but only 8,823 permanent modifications were canceled last month. Now that the number of active trials (364,077) is less than the number of cancellations, it is highly likely that the overall cancellation rate will go down.