The Housing Hangover

The Making Home Affordable program, announced last February and begun in earnest in April, consists of two primary components: The first involves helping borrowers in danger of losing their home modify their loans. The second allows homeowners who owe more than the value of their home to refinance at lower interest rates. The latter objective has worked more or less as planned, if very slowly. But the former -- called HAMP, for Home Affordable Modification Program -- has come under criticism since its inception.

At first, critics were concerned that HAMP simply replicated the predatory loan modifications offered voluntarily by the mortgage industry. But the program's standards are such that, when it works, it works: Participants end up paying only 31 percent of their monthly income to stay in their home, a very affordable standard. The administration has focused, rightly, on making sure borrowers can manage their monthly payments as the benchmark of their plan's success.

A more important criticism is that HAMP relies too much on cash incentives for the mortgage industry and doesn't do enough to force servicers to act in the public interest. As servicers continue to provide terrible customer service and move all too slowly to modify loans, that concern looks increasingly prescient.

Last week, a new report identified further challenges to the program. Produced by the Congressional Oversight Panel (COP), which oversees the bank-rescue program and has jurisdiction over Making Home Affordable, the report identifies real signs of concern: Foreclosure rates are at nearly four times the historical average; even now, nearly twice as many foreclosures are occurring as are loan modifications.

COP also points to two new problematic dynamics: First, rising unemployment is contributing to increased foreclosures. Second, over the next few years, mortgages that have low teaser rates or allow homeowners to put off paying the principal of the loan for years are set to reset in increasing numbers. This will put added financial pressure on cash-strapped homeowners who may have planned, during the height of the housing bubble, to solve such a problem by the then-easy task of obtaining a new mortgage. COP warns that Making Home Affordable isn't doing enough to deal with foreclosures due to mortgage resets, mainly because adjustable-rate mortgages leave homeowners with so much debt that modification isn't enough to help.

HAMP is also hindered by servicers' ability to provide customer service. It has taken time for mortgage companies to train their staff to handle the influx of potential modifications, and some have been lax about the effort despite pressure from Treasury -- perhaps a sign that there is not enough of a stick. Bank of America, which has the single largest portfolio of eligible mortgages, also has one of the lowest participation rates, having offered only 11 percent of borrower modifications under HAMP. The bank's spokespeople did not return calls for comment.

Still, Treasury has been improving some of its work with HAMP, steadily increasing the program's transparency -- releasing information about which mortgage companies meet modification goals and providing the specifics of what calculations each company makes in order to determine the modification a borrower will receive.

Treasury and the servicers have also increased the speed at which modifications are offered, already meeting the -- low -- initial goal of 500,000 trial modifications , which require homeowners to make payments for three months before the modifications become permanent. Treasury also says they are on track to meet the overall goal of helping 3 million to 4 million borrowers by 2012. But given that 10 million to 12 million foreclosures are expected by 2012, it won't be enough. The refinancing program within Making Home Affordable could help as many as 4 million or 5 million eligible borrowers, but thus far, only about 100,000 have been helped. There also isn't enough data to say if the program will ultimately succeed.

It's true that some of those 10 million to 12 million foreclosures don't require government help -- the homes are either far too expensive or owned by speculators, or the borrowers simply have accrued too much debt to maintain any kind of reasonable loan. But there are many responsible homeowners -- dinged by a bad economy, a predatory loan, or falling home prices in their neighborhood -- who remain in dangerous limbo.

Treasury is cognizant of HAMP's problems, but it is still focusing on improving the program's efficacy and responsiveness rather than shifting to a new program entirely. Treasury estimates that 1.2 million people are currently eligible for modifications, and it wants to make sure the modifications are offered rapidly and made permanent.

The most recent numbers -- though already outdated -- show 1,711 homeowners have made their modifications permanent. Hundreds of thousands of others are either in the process of paying their new mortgage for three months or haven't yet completed the paperwork. Treasury released a new system to streamline the paperwork early this month.

"The two biggest things we're focused on are converting trial modifications to full-time modifications and improving the borrower experience," says Seth Wheeler, a senior Treasury Department adviser on housing issues. "Our goal is not to put a stop to all foreclosures but to provide some support in stabilizing the housing market and to provide relief to millions of struggling families. ... We still need to do better, though. Implementation is often inconsistent and too many borrowers are having an uneven experience or even slipping through the cracks."

The problems that COP highlighted, however, won't likely be solved in the near future. The administration prefers to separate out its employment initiatives from this plan to support homeowners, counting on an enhanced social safety net and the stimulus to help reduce joblessness (though more should be done in these areas, as well). The breaking wave of loan resets doesn't appear to have any easy answers, either.

Housing advocates have called on Treasury to change HAMP in any number of meaningful ways, from emphasizing principal write-downs -- essentially erasing a large portion of the loan, a move opposed by lenders -- to allowing people in danger of foreclosure to stay in their homes as renters. Even tweaks to the current program's standards to widen eligibility would be useful. COP also recommends bridge loans for the unemployed to cover their mortgage payments. But thus far, Treasury officials have both reiterated their openness to these ideas and their intent not to implement them any time soon.

That decision may have negative consequences, however. Though COP warns in its report that it is too early to say if the administration's foreclosure response will be a success, it does write that

The existing federal foreclosure prevention programs appear unlikely to have a comprehensive or even substantial impact, and this makes it unlikely that they will succeed in macroeconomic stabilization. Clearly these programs are better than doing nothing, and for some families they will be a lifeline. These programs may well prevent the housing market from continuing a rapid decline, and that is an important accomplishment. But ... it is far from clear whether they will result in long-term housing market stability or whether new programs may be needed.

Treasury walks a delicate balance, fearful of the politics of bailing out anyone, whether they be homeowners or banks. New policies will be fiscally expensive, and admitting the need for them could be politically expensive. But will either cost be more expensive than failure?

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