Monday, the administration announced a nationwide campaign to push their failing Home Affordable Modification Program (HAMP) out of the HAMPer. Until now the focus has been on getting loan modifications started with a stated goal of reaching 500,000 trial modifications by November 1, 2009. Unfortunately, despite having successfully hit this goal, it is becoming increasingly clear that the program is failing, as few of these trial modifications have converted to permanent modifications. A little over half of the 650,000 borrowers who started trial loan modifications are eligible to convert to permanent modifications by the end of 2009. The administration’s announcement today is an effort to rescue the program and make sure these modifications actually do convert with a campaign to:
- Extend the trial period, to allow more borrowers to complete the paperwork.
- Develop publicly reported operational metrics, to hold servicers accountable for their performance.
- Possibly impose monetary penalties and sanctions on under-performing servicers.
- Engage HUD field-office staff and HUD-approved counseling organizations to distribute outreach tools.
- Engage the National Governors Association (NGA), National League of Cities (NLC) and National Association of Counties (NACo) in thousands of state, local, and county offices, to increase awareness of the program and assistance for borrowers.
Apparently the assumption is that borrowers aren’t completing the paperwork because it’s too complex or confusing. But what if they aren’t completing the paperwork because they’re reluctant to fall for another toxic mortgage?
High-risk, sub-prime option ARM loans contributed to this mess in the first place. To fix the problem the administration proposes to:
- Offer homeowners temporarily lower payments on loans they are unlikely to ever be able to repay.
- Force servicers to expedite applications under threat of public flogging, financial penalties and sanctions.
- Enlist private associations and government agencies at all levels to hawk the its program as being good for homeowners.
Maybe borrowers have figured out that this program is really only another exotic mortgage like one they fell prey to when they bought or refinanced the house that resulted in their current predicament. HAMP and the adminstration’s newly announced campaign isn’t digging borrowers out of a hole. It’s only digging them a new one, and delaying the inevitable.
The original hole was created with a clear downside and a theoretical upside:
- The downside: exotic financing, that qualified buyers for homes they clearly couldn’t afford by offering a low payment up front, despite unaffordably high payments in the future.
- The upside: the expectation that the appreciated value in the house will allow the borrower to refinance or sell at a profit before their payment skyrockets.
The new hole offered by HAMP is all the downside with none of the upside.
- The downside: exotic re-financing, by which they make payments affordable today, but leave homeowners in the same boat down the road when payments ratchet back up after 5 years.
- The bonus downside: there is no reasonable expectation that home values will appreciate anywhere near enough to get these loans above water before the 5 years is up, or before the homeowner runs into a real life event like job loss, divorce or job relocation – leaving them stuck in an upside down prison of debt.
What’s more, it’s not just bad for borrowers, it’s bad for everybody. Servicers and lenders simply delay their inevitable losses and suffer a lousy rate of return thanks to the artificially low payment until then. Everybody suffers as the economy limps along, as it is hard to justify a spending spree when you are upside down in your home by tens or even hundreds of thousands of dollars. Even the stealth stimulus package disappears as people make their modified mortgage payments.
The housing problem may need an intervention, but not this intervention. Like offering drugs to an addict, repeating our past mistakes by putting people back into exotic mortgages is certainly not the cure. It’s time to go through withdrawal and kick the habit by addressing the real problem, negative equity.
Sean,
Great post! I found this piece thanks to Nick Timiraos of the Wall Street Journal (he Tweeted it and recently wrote about it). Our blog has written rather extensively on the “unintended consequences” of HAMP, but we never referred to it as an “exotic mortgage.” We’re excited to add this element into the conversation. We also look forward to reading more of your articles in the future.
Again, nice post, thanks,
Tim
Sean,
You failed to mention the incentive NOT to participate. It is clear that foreclosure is not all that bad. Almost any excuse will get it postponed many times. Free rent for a year or two is way better than paying a mortgage. Think of all the stimulus for the economy. All those pesky payments can be spent on new Craigslist toys.
Also known as the Stealth Stimulus Package.
http://www.foreclosuretruth.com/blog/sean/stealth-stimulus/
Some have asked what makes these loan mods “exotic”. As crazy as things got in the credit bubble, not a single lender offered 150-200% loan-to-value loans. By focusing on payments rather than principal balance, HAMP, simply extends temporarily low payments (much like the exotic “option ARMs”), while recommitting the borrower to a loan for far more than their home is likely to be worth for years to come. I personally can’t imagine a more exotic offering.
You failed to mention that the banks have to carry the loan on their books as a bad debt even after they have modified the mortgage for those with speculative ability to re-pay. The only true correction is to foreclose or do a deed in lieu of foreclosure and resell the property to a qualified buyer who can pay a loan back. The banks will be able to then write off the difference of the bad debt/resale price and not carry the full bad loan amount. Everyone always points fingers at the banks, not the people who knew they could not afford the home, nor the folks who cleaned up on the sale of the property at the inflated values…the banks are the biggest losers, as they actually ended up holding the bag while all others profited (the buyer who lives for free until foreclosure is not a victim in my mind, they are less than honorable, no better than a thief).
http://makinghomeaffordable.gov/borrower-faqs.html#b9
Home Affordable Modifications
I can hardly believe some of the benefits listed below:
Treasury is providing incentives to your servicer to write the interest down to as low as 2 percent———More of my tax dollars wasted.
2% loan rates for up to 40yrs————I CAN’T GET THIS !
A portion of the principal could be also be forgiven———–this just is not right
Borrowers who make timely payments on their modified loans will receive success incentives————–For being good they get an additional benefit–WHAT that about?
Where is the TRANSPARENCY? I got an offer from Litton Loans for a modification DAYS prior to their signing the agreement with the Treasury. The terms put the mortgage behind I was told that the modification was then being CONVERTED TO A HAMP MODIFICATION, however, that NEVER HAPPENED. I would not be surprised though if LITTON LOANS GOT THEIR MONEY OUT OF THE HAMP FUNDING. Meanwhile they sent me a final version which I’d been TOLD would be a HAMP modification, it isn’t one, they relate they are STILL TRYING TO CONVERT IT TO A HAMP MODIFICATION, however, it is already recorded….
They will NOT EXPLAIN anything to me about what sort of fancy accounting they NEGLECTED to do, that has NOW resulted in a 6000 escrow shortage, along with NEW additions to the principal, since the date of the modification agreement….
I NEED HELP, AND THERE IS NO GOVERNMENT OFFICIALS WITH ANY SORT OF OVERSIGHT OVER THIS NONSENSE WHERE A CONSUMER CAN CALL AND GET THE HELP THEY NEED, OBVIOUSLY WILL NEED, TO KEEP THESE SAME PLACES THAT HAVE BEEN THE SUBJECTS OF MULTITUDES OF CONSUMER COMPLAINTS AND CLASS ACTION SUITS, HONEST.
They have NOW sent me a lengthy transaction history with absolutely NO REASONABLE EXPLANATIONS OF ANYTHING THEY’VE DONE. I guess I need a lawyer. Wish I had MONEY for one, unlike the crooks.
You may be able to get some help from HUD. Go to http://www.hud.gov/hopeforhomeowners. There you can find a link that will lead you to a HUD counselor. Good luck and don’t give up.
Thanks Tracy.
Believe me I’ve TRIED, I also filed a COMPLAINT with the AG in TX.
Get this Litton NOW shows an expected ESCROW SHORTAGE of OVER EIGHT GRAND!!
I don’t get why the will NOT refigure the modification TO KEEP THE PAYMENT affordable for me. Doesn’t matter how high they jacked that principal up, because otherwise I will be on my way to court to file for bk ; (
The previous comment was for Cindy. Shawn, you are so right.
I talk to homeowners every day who are praying for a loan mod. and never consider the fact that they will owe more than their home is worth for many years to come. Is it that homeowners prefer to “live in the dark,” or is it that our government is hoping that homeowners will not figure out that they have been taken advantage of once again. There is plenty of blame to throw around, but the housing market “is what it is.” The HAMP program seems to ignore the proverbial “elephant in the room.” A temporary reduction in a house payment does not solve the problem.
I have a friend who is in dire need of refinancing his property but his property is being appraised at $30,000.00 less than what is owed to the bank. Then they will only refinance 80% of the appraised value. Can anyone give any advice as to how he can get the entire amount owed on the property refinanced? Thanks, God Bless!
Your friend should check out the Home Affordable Refinance Program. It allows refi’s up to 125% of what the home is currently worth. More information can be found here including an online questionnaire to determine eligibility: http://makinghomeaffordable.gov/refinance_eligibility.html
Great Post!! The big problem in our area that homeowners are so desperately trying to keep their homes that they don’t realize that they are hanging on to a bad debt. It is the old ” can’t see the forest for the trees” scenario. It is very sad.
Great comments everyone. I work for HUD counselors and also a big servicing company. We have seen many being declined on the Making Home Affordable programs. We suggest that people should try again. Many get declined more than 2-3 times. Consumers are getting frustrated, they turn to others who would charge them $3500 to $10,000, promise to do a forensic review of their loans, phantom BK to keep their homes from being foreclosed, the victims end up loosing their homes even faster. There are more frauds now than ever, I meet the victims everyday. The stories are all similar, trusting bad people wearing sheep clothing.
Shame on you Marie, if you’re a housing counselor. This is a terribly inaccurate article.
1. It does not go ‘back up’ after 5 years. It goes to a fixed rate based on the market rate at the time of permanent mod signing, which is like 5-5.875% at the most right now.
2. You can’t get a permanent mod without showing good faith to pay the new mortgage and a stable income for at least 5 months. The review takes 2-4 months average, then the trial period takes 3-6 months.
3. We don’t ‘hock’ the program as hud-certified non-profit counselors, we’re not salesmen. Payments can go up surprisingly after the trial period, but servicers are no longer allowed to offer trials without verifying documents, esp. income. Break your argument up into pieces if you want to discuss this.
Housing Counselor, here is a break down of points if you’d really like to discuss further:
1. LTV exceeds 100% in nearly all cases. Almost none of the worst subprime loans offered this.
2. Total debt to income after HAMP is at 60%, per Treasury’s latest report, and that is based on the temporarily reduced payment. I’m not aware of any subprime lenders that allowed that. Only by lying about your income could you get a loan you couldn’t afford before… now the government will give you a loan you can’t afford without lying. Progress?
3. Payments DO go “back up”. They absolutely do not stay at the temporary reduced payment. The reality is that the payment may be HIGHER than the customers current fully amortizing ARM payment given your statement of 5-5.875 fixed as some adjustable indexes remain quite low.
4. The “stable” income you claim is carefully reviewed isn’t sufficient to make a fully amortizing payment today. Further no attempt is made to determine the likelihood that the borrowers income will increase to a level sufficient to afford the stepped up payments in the future. Isn’t this exactly what “predatory lenders” have been accused of doing?
5. I’m not sure who you are, but it would be ridiculous to state that the administration isn’t “hocking” this program given their push to hit artificial goals, announced conversion campaigns, etc.
Let’s get real. Making Home Affordable isn’t about keeping people in their homes. It’s about making people think there is help and getting positive press while robbing them of a few more payments before they inevitably lose the home anyway.