Back in March 2009, the Obama administration unveiled the Home Affordable Modification Program, or HAMP, a program for helping delinquent borrowers save their homes from foreclosure - a problem that got worse again in reports released just last week. The goal of HAMP was to "help 3 to 4 million homeowners by 2012." This phrase should have read "help or hurt" because hurt is exactly what has happened to hundreds of thousands of homeowners who have attempted to use HAMP to save their homes.
How is it possible that a program for providing mortgage modifications could hurt homeowners? To understand this, we need only look at how HAMP has worked - in practice. As reported in its most recent report for December 2010, HAMP has led to 1.47 million "trial modifications" that have resulted in 580,000 "permanent modifications," but 735,000 "trial modifications [have been] canceled." The half-million permanent modifications are noteworthy achievements, so long as they don't result in a high percentage of re-defaults, as has been the case for past modifications.
But what about the almost three-quarter-million borrowers whose trial modifications were canceled? Are they better off or worse off from participating in HAMP? In perhaps hundreds of thousands of cases, the answer is worse - far worse. To understand how that happened, we must go back in time to see how and why these borrowers entered into the program. According to a survey by ProPublica, a nonprofit journalism organization, almost half of respondents reported that "they were advised, incorrectly, to fall behind on their mortgage in order to qualify for a modification." In other words, these homeowners were current on their mortgages and only defaulted in order to qualify for HAMP - because you had to be in default before you could get government help. Indeed, the survey respondents reported, they only fell behind on their payments after being advised by their lender, loan servicer or other supposedly reliable third party that it could help their situation. Extrapolating the survey results to the 1.4 million HAMP participants, this situation likely describes the experience of a half-million homeowners: duped into delinquency.
As bad as this sounds, it gets much worse because these borrowers typically were not told all the potential consequences of falling behind on their mortgages. Consider the case of one borrower I know who followed the advice of his servicer to default in order to qualify for a trial modification, as HAMP is only available to delinquent homeowners. This borrower successfully obtained a trial modification that reduced his monthly payment from $2,000 to just $1,200. The trials are supposed to last just three months, but after three months, this borrower was told to continue making the modified payments until a decision could be made on his application for a permanent modification. Eight months passed, with eight timely modified payments made to the servicer, and then the homeowner was notified that the application had been denied because of failure to file required paperwork that had, in fact, been filed but that the servicer had lost repeatedly. ProPublica reports that "losing documents and giving false information" is an almost universal complaint of respondents to its survey.
Worse yet, this homeowner was told that he was responsible not only for the next month's full mortgage payment of $2,000, but also for the cumulative difference in the trial and full payments for the previous eight months (a total of $6,400), for late fees ($800), for foreclosure fees ($1,900) and for foreclosure attorney fees (1,400), a grand total of $10,500. This borrower, who was never advised of this possible outcome, did not have $10,500 saved up for such a contingency and could not comply. Instead, the servicer initiated foreclosure proceedings, where the situation now stands. Fortunately, this borrower lives in a judicial foreclosure state where the process can take longer. In a statutory foreclosure state like Virginia, the house likely would have been lost already at a sheriff's sale.
Was this homeowner helped or hurt by HAMP? He was in financial distress but able to make his monthly payment by skimping on everything else. He reached out to HAMP for a lifeline; instead, he received a noose around his financial neck.
How could this situation have been avoided? Clearly, more disclosure would have helped. With the full set of facts regarding potential outcomes, this homeowner and the hundreds of thousands in similar situations never would have defaulted in the first place. Better yet, why don't regulators require servicers to accept the modified payment as payment in full for the length of the trial-modification period, require servicers to make a binding decision after the three-month trial period and require servicers to forgo late fees and other penalties when a trial modification fails? Or perhaps, as Republican lawmakers have suggested, it is simply time to pull the plug on HAMP and apply the $30 billion that remains allocated for HAMP to other purposes.
Of course, the servicers don't want to give up these lucrative sources of income, which have turned foreclosure into a profit center at the expense not only of borrowers, but also of the investor-lenders whom the servicers represent. Typically, fees get paid to servicers before principal and interest go to investors. In fact, investors want to change the terms of their contracts with servicers to put their own best interests ahead of the interests of the servicers. However, the trustees who represent most investors are other Wall Street bankers, who thus far have failed to take action against the servicers, who also are Wall Street bankers.
Just last week, the December S&P/Case-Shiller Home Price Index confirmed that housing has entered into a double-dip recession. December data from LPS Applied Analytics shows that 2.2 million mortgages are in the process of foreclosure; another 2.1 million are seriously delinquent and most likely headed into foreclosure. At the current rate of foreclosure sales, we are looking at three years or more before this inventory works its way through the legal system; as it does so, housing prices will continue to decline, dragged down by the sale of foreclosed properties. Until changes are made to the way delinquent mortgages are serviced in the United States, the housing market will continue to decline, likely dragging our economy into a double-dip recession.
Rebel A. Cole is professor of finance and real estate at DePaul University.
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