The Treasury’s latest report on the administration’s Home Affordable Modification Program (HAMP) showed a 16 percent drop-off in permanent modifications completed during September, with over half of the 1.36 million trial plans started already canceled from the program, and 11 percent of borrowers re-defaulting on their new loan. The special inspector general for the Troubled Asset Relief Program (SIGTARP) issued a new report to Congress, which shines a very negative light on HAMP’s progress so far. In it, he points out that the 467,000 homeowners who’ve received permanent modifications under the program “stands in stark contrast” to the 5.5 million homes receiving foreclosure filings and more than 1.7 million homes that have been lost to foreclosure since January 2009.
Special Inspector General Neil Barofsky said in the report “Treasury…now finds itself defending a program that is failing to meet TARP’s goal of preserving homeownership. As a result, a program that began with much promise now must be counted among those that risk generating public anger and mistrust.”
Barofsky says the problems that HAMP and its companion programs are meant to address, unfortunately, remain painfully clear as the housing crisis continues. HAMP offers monetary incentives to lenders and servicers, investors, and the homeowners themselves to encourage a mortgage modification over foreclosure, but several top officials say the fiscal perks aren’t enough.
“The lenders foreclosed on borrowers because it’s in their financial interest to do it,” said Paul Willen, a senior economist and policy adviser for the Federal Reserve Bank of Boston, at a mortgage and housing finance summit hosted by the Federal Reserve and the FDIC in Virginia this week. Willen went so far as to say the administration’s flagship foreclosure-prevention program is a reflection on three years of failed policies. “We can’t prevent millions of foreclosures using the tools people are currently using,” Willen said.
To stem the still-raging foreclosure crisis in America, Willen says the government has to be prepared to spend more money. “To prevent foreclosures we must pay lenders or borrowers a lot of money or force lenders to modify loans even when they don’t want to,” Willen said. Speaking at the housing conference in Virginia, FDICChairman Shelia Bair said, “We know from experience that reducing the monthly payment through modification raises the chance that the borrower will make good on the loan. We also know that in too many instances, servicers have not made meaningful efforts to restructure loans for borrowers who have documented that they are in economic distress.”
Bair noted that the FDIC’s work on IndyMac loans provides evidence that raising the size of the payment reduction from 10 percent to 40 percent or more can cut re-default rates by as much as half. She floated the idea of advancing more sustainable mortgage modifications by offering lenders a legal “safe harbor.”
For occupied properties, Bair said as long as lenders offered a delinquent borrower a “meaningful payment reduction – say a minimum of 25 percent,” if the borrower still could not keep up with payments on the new loan, the lender would earn safe-harbor protection to move forward more easily with what she said has become a “necessary and justified” foreclosure.
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