Is there any hope for the Obama administration's much maligned, $75 billion homeowner relief effort, the Home Affordable Modification Program (HAMP)? Government watchdogs, consumer advocates, and lawmakers have, since its unveiling last March, repeatedly criticized HAMP and its architects over at the Treasury Department for any number of reasons—the program's paltry results, Treasury's efforts to move the goal posts for HAMP success, the disproportionate number of carrots and too few sticks in the program, and much more. In just over a year, the program, which was initially predicted to help three to four million homeowners, has provided permanent loan modifications (an agreement between the mortgage servicer and homeowner to lower monthly payments through interest rate or principal reductions, or extending the loan's life) to 228,000 homeowners, according to Phyllis Caldwell, the head of the Homeownership Preservation Office within the Treasury. By contrast, there were 2.8 million foreclosures in 2009, and some three million more are projected this year.
Last month, the Treasury rolled out its most comprehensive changes to HAMP yet. The new rules, the Treasury said, could pave the way toward fewer foreclosures by urging more principal reductions, providing relief to unemployed homeowners, and letting homeowners convert their mortgage to a federally-backed, more secure loan. But will these changes really do much good, salvaging what some say has become a $75 billion boondoggle? That's the question the House financial services committee took up on Wednesday, bringing together top administration and industry officials, academics, and other experts to weigh in on HAMP's new look. Unfortunately, what the majority of those experts had to say didn't bode well for Obama's flagship program.
A common refrain among those who testified yesterday was that HAMP remains a mostly voluntary program; that Treasury has yet to force mortgage servicers, who are the boots-on-the-ground connection to homeowners, and investors to make tough but necessary changes. Take principal writedowns, the reduction of how much someone owes on their mortgage. While HAMP's new changes encourage principal writedowns, they still don't make them mandatory, but rather dangle yet more incentives over servicers to get them to write down principal. "The new principal reduction approach (which will not even be implemented until close to the end of this calendar year) is unlikely to coax many servicers into reducing principal," said Alys Cohen, an attorney with the National Consumer Law Center.
Moreover, coaxing servicers to decrease principal and offering more money to do so reflects the Treasury's insistence on incentives over requirements. "Unfortunately, as HAMP has been implemented, Treasury has largely relied on large carrots to get servicer participation and has generally, if not entirely, eschewed sticks," said Andrew Jakabovics, of the Center for American Progress. "Borrowers and their advocates frequently find servicers are making mistakes on a range of program elements but there is no consistent, independent mechanism for redress, despite calls for developing a robust appeal process since the program’s beginning." Treasury's avoidance of mandatory principal requirements—or what's called "cramdown," in which bankruptcy courts are allowed to rewrite the terms of a mortgage—aligns with the position of the mortgage industry, as evidenced by the testimony yesterday of Robert Story, the chairman of the Mortgage Bankers Association, which opposes these tougher provisions.
Several experts yesterday also doubted the administration's plan to help unemployed homeowners by reducing their mortgage payments for a period of up to six months while they try to find work. The NCLC's Cohen, for instance, doubted whether six months was a sufficient period of time to find a new job; indeed, the Bureau of Labor Statistics reported earlier this month that 6.55 million workers had been out of work for more than 26 weeks, a national record. If so many workers are jobless for more than six months, will this addition to HAMP do that much good?
Big question marks remain in the structure of HAMP, Wednesday's hearing showed. The net present value test—used by mortgage servicers to determine whether someone gets a modification or not—has yet to be made public, which means there's no transparency or accountability for a core element of HAMP. Moreover, Treasury has yet to announce any kind of penalties or corrective actions for servicers who don't comply with HAMP's guidelines, said Cohen.
And as Valparaiso law professor Alan White described, HAMP's overall impact has actually been to decrease the total number of modifications, both public and private. Before March 2009, when HAMP came out, permanent modifications numbered around 120,000 a month; soon after, that figure dropped to 80,000 or so a month. Now, a year after HAMP's release, White said, those modification numbers were returning to pre-HAMP levels. "There is still no overall increase in modifications, or reduction in foreclosures, resulting from HAMP," White said. What's more, data released by the Treasury this week showed that the number of homeowner defaults by those who'd received a permanent modification nearly doubled in March. And in a report released Wednesday, the Congressional Oversight Panel stated that 75 percent of homeowners in HAMP remained underwater, meaning they owe more than their house is worth.
In his testimony, White questioned the entire premise of HAMP. He dubbed the program's philosophy "extend and pretend," suggesting that the program merely moves homeowners' debt a bit further into the future, kicking the can down the road, rather than addressing the issue of negative equity and out of whack mortgage payments right now. The only way to truly address the foreclosure crisis, he said, was to mandate principal reductions for homeowners—not use small incentive payments and other carrots to lure servicers into helping people.
In all, most of the testimonies reflected a widely held skepticism about HAMP, new provisions or not. Those experts essentially suggested that, unless the program is largely reimagined, it won't do much at all to help the millions of homeowners still clinging to their houses.