For mortgage relief, one size does not fit all

As noted in last Friday’s New York Times article, the well-intended Making Home Affordable Program that promised to help millions of borrowers is falling well short of that goal. The latest figures show that a total of 422,000 borrowers have been converted into permanent modifications, while 616,000 trial modifications have been cancelled. That means 46% more trial modifications have been cancelled than converted to permanent. The HAMP program, scheduled to run into 2012, appears to be losing steam, with only 17,000 new trials begun in July.

A significant impediment to both qualification and HAMP's success are the established debt-to-income (DTI) ratios facing heavily indebted consumers. The median front-end or cost of housing-to-income ratio of consumers entering the program is 44.8%, and through the HAMP modification, that median ratio is brought down to 31%. This ratio is static regardless of household income or credit profile. What is most troubling is these same consumers have a median back-end ratio (total debt-to-income burden) of 63.5% post-modification, which is not sustainable.

Sophisticated analytics are required, now more than ever, to balance the objectives of both the investor and consumer. A FICO white paper explores the approach in detail, but in essence, these analytics must allow a servicer to factor in regulatory and investor policies, business constraints, consumer credit profiles, and economic forecasts to create an optimal decision at both the loan and portfolio level.

In fact, FICO research has demonstrated that loan-level NPV-based optimization applied within the same policy on DTI range is significantly better at reducing re-default rates and improving the net present value (NPV) than the target DTI/waterfall programs in place through HAMP today.

We know that homeowners are not all the same. Let’s stop treating them as such.