HAMP: Still fundamentally brokenby Tim Manni
Last week I wrote about how one Treasury spokeswoman said that modifications outside of the home affordable modification program (HAMP) were so successful because of all the “tools” making home affordable has made available to servicers. That is, the government’s efforts have spurred private markets to respond with their own, more successful programs.
Ed Pinto, the former chief credit officer of Fannie Mae, testified in late June before the House Oversight Committee, saying that “HAMP reversed the upward trend in the numbers of [private sector] modifications and hopelessly tied the modification process up in knots.”
Even with all the changes to HAMP in its 18-month existence, we still haven’t gotten it right, and two studies released this week confirmed my belief that HAMP remains fundamentally broken, and thus a grand failure.
Here’s what’s wrong with HAMP
The results from a study released this week by the State Foreclosure Prevention Working Group — which is comprised of 12 state attorneys general and state banking regulators — revealed that: 1) a large portion of borrowers have either already been rejected from HAMP or haven’t ever pursued it; 2) not enough lenders are willing to reduce borrower principal; 3) modifications that don’t reduce a borrower’s monthly costs are useless and a waste of time (emphasis added):
…nearly 63% of homeowners with seriously delinquent loans aren’t taking part in foreclosure prevention programs, the group found.
“There is still a tremendous amount of work to be done to prevent unnecessary foreclosures,” said Neil Milner, president and CEO of the Conference of State Bank Supervisors, which is part of the working group. “Servicers must continue to perform meaningful outreach to those homeowners who are seriously delinquent and to perform modifications with significant principal reduction.”
The report said recent modifications that reduce principal balances on loans have a lower default rate than those that merely cut the interest component of monthly payments.
But most banks don’t take that route, according to the report.
Only one in five modifications reduced the loan amount, with the “vast majority” of modifications actually increasing the total loan amount by adding service charges and late payments to the loan balance, the report said.
It’s important to remember that this study examined modifications from 2008 and 2009 (HAMP didn’t begin until Feb. 2009). However, I don’t think anyone is convinced that the HAMP program is producing any better outcomes in 2010. Another recent study backs up that speculation:
According to government figures released on Monday, only 434,716 homeowners have received permanent mortgage modifications as of July. Meanwhile, the Treasury Department has cancelled the temporary modifications of 616,839 borrowers, with 96,025 modifications cancelled last month alone.
Even the man in charge of overseeing the TARP program agrees that the federal loan modification program is fundamentally broken:
Neil Barofsky, the special inspector general overseeing the Troubled Asset Relief Program, released an audit of HAMP in March concluding that even if it processed millions of permanent mortgage modifications, “the program will not be a long-term success if large amounts of borrowers simply redefault and end up facing foreclosure anyway.” It appears that is what’s happening.
What good is a loan modification that doesn’t stick?
Leading industry observers at Fitch Ratings have predicted that as many as 75% of homeowners receiving permanent modifications under the government program will fail to make their reduced payments and redefault.
It isn’t hard to understand why: The median debt-to-income ratio for HAMP borrowers in permanent modifications remains staggering at 63.5%. By comparison, the Federal Housing Administration (FHA) generally imposes a 41% cap on borrowers’ debt-to-income ratio. The FHA does allow for exemptions if there is evidence of substantial cash reserves or an acceptable credit history—neither of which is the case for distressed HAMP participants. Clearly, too many who get a HAMP mortgage modification are still over their heads.
Changes, changes, changes
The sheer number of changes to HAMP, while intended to improve the program and make it more accessible to more homeowners, has put servicers, and thus borrowers, at an incredible disadvantage:
Last year the rules were changed eight times, and Treasury has changed the rules five more times thus far in 2010. More than a million homeowners have applied for mortgage modifications, but the program’s complex rules have made for a grindingly slow process—and kept many homeowners in limbo.
Where, when does it end?
The rules for HAMP have changed 13 times, and the program isn’t set to expire until 2012. Not a single report so far has shown that the program is succeeding on a long-term basis.
I have had a post-it note taped to the bottom of my computer monitor since the time HAMP was announced. It’s now faded, wrinkled and peeling off, but every time I read another report on these federal housing programs — designed to preserve homeownership — I read it to myself: “When all is said and done, how much are we spending to save how many mortgages?”
The question remains unanswered…But the number increases every single day. The dust still hasn’t settled from the housing market collapse. I have a feeling that when it does I won’t like the answer.