Will HAMP standards address its failure?by Michele Lerner
The National Consumer Law Center (NCLC) recently released a review of the federal government’s Home Affordable Modification Program (HAMP). The consumer advocacy group not only called for the modification program to be extended past 2013, but also called for lawmakers to release modification standards for mortgage servicers nationwide.
“National loan modification standards can directly address failures in the mortgage market, save millions of homes in the near future, and reduce losses to investors, homeowners, and communities for decades to come,” according to At a Crossroads: Lessons from the Home Affordable Modification Program (HAMP). “But the government must act now.”
HAMP advocates for years have said that the federal modification program, while falling short of its original goal to modify up to 4 million mortgages, provided servicers with a blueprint for how to successfully modify troubled mortgages. The NCLC agrees, and feels lawmakers should standardize the process much in the way the Consumer Finance Protection Bureau released a sweeping definition of what constitutes as a Qualified Mortgage.
While no national standards currently exist for how lenders evaluate or assistant troubled homeowners, the CFPB did announce Thursday that the lending industry must examine all available options to keep a troubled borrower in their home.
Report: Why we need HAMP standards
“Although HAMP never covered the entire mortgage marketplace, HAMP’s failure to reach its intended scale has one root cause: massive servicer noncompliance,” according to the report.
The report continues, “We need uniform, strong mortgage servicing standards that put the entire industry on equal footing and give qualified homeowners access to efficient and enforceable mortgage servicing rules to save their homes. The content of these standards, regardless of which agency or agencies first adopts them, must be informed by the lessons of the last several years of loss mitigation efforts, particularly HAMP. By examining the HAMP experience, policymakers can shape servicing standards that will build on the program’s successes and avoid its failures.”
Recommendations for national modification standards
The NCLC report offers five key principals for national loan modification standards:
- Efficiency: Mandatory, standardized loan modification evaluations before any foreclosure can proceed.
- Affordability: Require affordable monthly payments and prioritizing interest rate reductions and principal forgiveness.
- Accessibility: Easing access to loan modifications, including those with second-mortgage debt, extended unemployment, subsequent hardships after modification, and those who inherit a mortgage after death or divorce.
- Accountability: Transparency and accountability throughout the loan modification process are essential.
- Enforceability: Homeowners must be protected from servicers’ noncompliance.
HAMP standards: Why it won’t happen
Richard Green, director of the University of Southern California (USC) Lusk Center for Real Estate in Los Angeles, says that while he is sympathetic to some of the report’s recommendations, some of the report’s recommendations are simply unworkable.
“Maybe it would be a good idea to have uniform national standards, but first you would have to find a way to standardize all the existing state laws that apply to mortgages such as recourse and non-recourse states,” says Green.
“They want to have the same rules in place for a normal market and in an emergency,” he says. “The ability of lenders to foreclose quickly is an important part of a normal functioning housing market. There’s no doubt that lenders needed to be saved from their own shortsightedness, but now they have come around and short sales, for instance, are easier to do.”
Creating the same level of modification assistance also doesn’t differentiate between borrowers and their individual situations, says Green. Someone who wiped out the equity in their home to pay for vacations shouldn’t be treated the same as a homeowner who put 20 percent down but lost their job, says Green.
And then there’s the hot-button issue of principal reductions.
“I think principal forgiveness should only be considered under circumstances that are out of the homeowners’ control, such as their location in an area with high unemployment and home values that have dropped substantially,” he says Green.