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February 25th, 2009

Some Questions about HASP – Part 1

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We’ve already expressed our initial thoughts about the Housing Affordability and Stability Plan announced last week. We also weren’t shy in expressing our unfavorable reaction in the HSH Market Trends newsletter:

We also don’t see anything to like in either of the “incentive” provisions. Paying servicers $1000 per year for up to three years because the borrower made payments on time is ludicrous. Servicers exist to service loans. What additional services will they perform to warrant a bonus?

Equally infuriating is the perverse incentive by which the government will reduce, by as much as $5,000, the outstanding balance of the loan for a loan-modified borrower. Not only might these loans be modified at taxpayer expense; the borrower will also receive more favorable loan terms (perhaps permanently) and get their loan balance reduced by $1,000 per year — all for failing to meet their contractual obligations in the first place.

We’ve asked this before and we will keep asking: Where do the folks who have lived up to their obligations go to sign up for a similarly sweet deal for simply making payments?

Perhaps worst of all: the government is prepared to implement these loan mod plans even after reports that as many as 55% of them will fail after as little as six months!

Granted, the program’s final details won’t be known until next month, but we hope that it won’t be as seriously flawed as it appears, and that the administration will address at least some of these flaws. Here’s our first concern:

Question: Will only truly deserving homeowners get help?

CNBC’s Rick Santelli gave voice to many frustrated taxpayers by wondering why we should “pay for your neighbor’s mortgage that has an extra bathroom and can’t pay their bills.”

No one would begrudge helping out homeowners who are truly down on their luck — say, because one or more wage-earners is now unemployed. Whether this is the right way to do that is arguable (and the arguments will continue).

However, the Obama administration promised that his plan will only help those who have acted responsibly but are in danger of losing their home:

“Here’s what this plan won’t do,” [White House Press Secretary Robert] Gibbs said. “It won’t help somebody trying to flip a house. It won’t bail out an investor looking to make a quick buck. It won’t help speculators that were betting on a risky market. And it is not going to help a lender who knowingly made a bad loan.”

If that’s the goal (and Gibbs did acknowledge that “there will be people that made bad decisions that in some ways will get help”), lenders would need to review their mortgages on a case-by-case basis. This would, of course, be extremely time-consuming, which runs counter to the program’s stated objective of moving quickly to stem foreclosures.

But recent comments from Sheila Bair, the head of the FDIC, suggest otherwise:

Similarly, the head of the Federal Deposit Insurance Corp. suggested this month it’s not likely aid will be denied to all homeowners who overstated their income or assets to get a mortgage they couldn’t afford.

“I think it’s just simply impractical to try to do a forensic analysis of each and every one of these delinquent loans,” Sheila Bair told National Public Radio.

This is confusing, and more than a little ironic, given that the loan-mod portion of HASP is modeled after the FDIC’s own streamlined loan-mod program for IndyMac borrowers, according to the Obama administration’s Home Mortgage Crisis Fact Sheet:

Institute Clear and Consistent Guidelines for Loan Modifications:

Treasury will develop uniform guidance for loan modifications across the mortgage industry, working closely with the bank agencies and building on the FDIC’s pioneering work.

Again, the final details of the HASP program won’t be known until next month, so we’ll reserve final judgment until then. In the meantime, however, such remarks won’t encourage already-upset taxpayers.

Readers — we know you’re not shy about chiming in. What do you think?

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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