The housing market has been on a roll this past year. Prices are rising; vacancy rates are falling; and homeowners are spending small fortunes on upgrading properties. In this context, a White House initiative, the Home Affordable Modification Program, or HAMP, launched in 2009 to reduce mortgage payments for millions of owners at risk of foreclosure, appears downright irrelevant. But Obama Treasury Secretary Jack Lew announced this morning that his boss will extend the program for two years beyond its scheduled December 31, 2013 expiration date for new applicants. In April, the Office of the Special Inspector General for the Troubled Asset Relief Program (TARP) released a quarterly report (see pdf) concluding HAMP is rife with delays and alarming default rates. “This is a significant problem,” noted Inspector General Christy Romero. “When homeowners fall out of these modifications, all of a sudden they’re facing huge mortgage payments.” Then there is the larger issue of why the program was created.
The Home Affordable Modification Program, which does not require congressional action, was created as a centerpiece of the Obama administration’s emergency strategy to stem the rising tide of foreclosures. Developed by the Treasury Department in consultation with then-Federal Deposit Insurance Corp. Chairwoman Sheila Bair and other top federal officials, HAMP was unveiled in March 2009 and quickly went into operation that April. The purpose would be to aid homeowners who were behind on their payments but stood a reasonable chance of catching up. Banks already had their bailout when Congress passed, and President Bush signed, the TARP legislation the previous fall.
The new Obama administration saw a win-win situation. Anywhere from 3 to 4 million homeowners could be spared the anguish of losing their homes. Banks would avoid needless time and expense of acquiring, managing and selling huge inventories of foreclosed properties. And neighborhoods with high concentrations of such properties, often in disrepair, would be stabilized. The program could draw upon as much as $75 billion in federal funds; TARP would supply $50 billion and Fannie Mae/Freddie Mac, each having been placed under federal conservatorship in September 2008, would supply the other $25 billion. The program would rework mortgages that were originated prior to 2009 and delinquent for more than 30 days. The outstanding balance on a first mortgage would have to conform to the current Fannie Mae/Freddie Mac loan limit of $729,750. Loan modifications would occur in trial and permanent phases. The trial phase, set to last 90 days, would require borrowers to make three timely payments. Borrowers who cleared this hurdle would be eligible to move on to the permanent phase, during which their monthly mortgage payment (including property tax, property insurance and homeowner association dues) would be lowered to 31 percent of pretax household income. This phase could last up to five years. As an incentive, homeowners who made timely payments would be eligible for up to a $1,000 reduction in principal for each year they remained in the program. Mortgage servicers and outside investors would have incentives of their own for attracting borrowers and collecting payments.
Given the deteriorating state of the housing industry, a lot was riding on this program. Starting in December 2007, estimated the Irvine, Calif.-based RealtyTrac, banks and other creditors by Fourth Quarter 2010 had seized more than 2.3 million residential properties, or about 3 percent of the nation’s owner-occupied housing stock. Millions more homes either were in foreclosure or at risk of entering it. On top of that were homes in which timely payments were being made but had negative equity; the loan balance exceeded the market value. RealtyTrac at the time estimated that 23.1 percent of all mortgaged homes, delinquent or not, were in this “underwater” condition. With vacancy rates rapidly rising in many local markets, builders had that much less incentive to build. New private housing starts in 2009 and 2010, respectively, were 554,000 and 587,000, only roughly a third of the annual average during 1998-2006.
To supporters, the Home Affordable Modification Program seemed an ideal rescue mission. Yet it has worked less well in practice than on paper. A progress report issued in August 2010 by the U.S. Treasury Department indicated that of the 1.3 million trial modifications approved by the close of the previous month, about 616,000 already had been cancelled. In January 2011, then-TARP Special Inspector General (SIGTARP) Neil Barofsky released a report concluding HAMP “continues to fall dramatically short of any meaningful standard of success.” There had been about 522,000 permanent modifications performed in 2010, the report acknowledged, but more significantly, there had been through that year a combined 792,000 cancellations of trial and permanent modifications and another 152,000 modifications in limbo. Barofsky observed that mortgage servicers contributed to the high level of attrition by imposing unnecessary delays, ignoring program guidelines, and misplacing paperwork.
The most recent SIGTARP evaluation, part of the agency’s most recent quarterly report to Congress published on April 24, provides more evidence of deficiencies in HAMP. Slightly over two million “Tier 1” loans (i.e., owner-occupied dwellings) had trial mortgage modifications, roughly evenly divided between the TARP and the Fannie Mae/Freddie Mac varieties. Terms were at once generous and flexible. Among the 862,279 Tier 1 loans that received permanent modifications (as of February 28), 97 percent involved an interest rate reduction; 62 percent involved a term extension; 33 percent involved principal forbearance; and 13 percent involved principal forgiveness. Yet despite these various ways of lowering the bar, more than a fourth of all participants were dropped from the program. And that’s apart from the nearly 40 percent default rate for trial modifications. The audit concluded:
HAMP has continued to fall well short of its stated goal of helping as many as three to four million homeowners. As of March 31, 2013, of the 2,005,294 HAMP modifications that had been started, more than half, 1,087,139, or 54%, were cancelled and removed from the program…which includes 774,619 cancelled trial modifications and 312,520 cancelled permanent modifications. Historically, since late 2010, the proportion of active and cancelled HAMP modifications has remained unchanged at around 46% active modifications and 54% cancelled modifications.
The report added that a turnaround in the near future is unlikely:
The number of permanent modifications that had been cancelled increased each year. In 2010, only 4% of homeowners who had begun trial modifications had their permanent modifications eventually cancelled, but by the end of 2012, 14% of homeowners who had begun trial modifications at any point in the program had their permanent modification eventually cancelled.
Spending figures also are less than encouraging. Of the $22.7 billion allocated for HAMP through this March, about $4.3 billion, or 19 percent, had been spent. The largest portion of expenditures – $3.8 billion – went for incentives for modifications of Tier 1 first liens. Mortgage servicers received $1.41 billion; investors received $1.63 billion; and borrowers received $744 million. In other words, borrowers have gotten only about a fifth of the money.
Treasury Department officials have taken issue with a number of the report’s conclusions. They insist, among other things, that HAMP has assisted 6.5 million homeowners, far more than the 1.1 million reported by SIGTARP. Moreover, they claim, the total default rate for permanent modifications is a good deal lower than the 25-to-30 percent range. Department spokesperson Anthony Coley states: “Data show that the majority of homeowners who receive assistance from HAMP have a high likelihood of long-term success to avoid foreclosure, and…HAMP modifications continue to outperform private industry modifications.” The Office of the Comptroller of the Currency, which regulates commercial banks, attributes the difference in cited default rates to HAMP’s emphasis on monthly payments as a percentage of borrower income, verification of income, and the inevitable high rates of attrition during the trial period. For the sake of argument, let’s say the Treasury Department, which runs TARP, is right. Even so, that doesn’t justify the continuation of HAMP. For the program represents a large-scale attempt to replicate what banks do – evaluate risk, and extend or modify credit on that basis at highly favorable terms. In other words, the program is a bailout of borrowers who were in way over their heads or weren’t but could have obtained a modification from a lender without federal funds. Even an efficient bailout is still a bailout.
It’s worth noting, and more than in passing, that the program from the start has been a feeding ground for fast-buck fraud artists. By the close of 2011, more than 19,000 homeowners nationwide already had complained of getting scammed to the tune of more than $50 million. Blog sites have begun to spring up for the purpose of enbabling homeowners to post messages about their experiences with HAMP. And SIGTARP has investigated a number of complaints, and on occasion has yielded criminal convictions – witness the recent guilty pleas of Mark Farhood and Jason Sant, co-masterminds of a multimillion-dollar nationwide HAMP “mortgage rescue” scam. But there are likely many more such cases awaiting similar closure. SIGTARP’s Romero, at the time deputy inspector general of the agency, stated a year and a half ago: “Servicers have got to start complying with the rules and get better about communicating with homeowners. Treasury needs to hold servicers’ feet to the fire to protect homeowners.”
What is especially ironic about HAMP is that the overall housing market since 2011 has been on the upswing. Indeed, the comeback is now of sufficient strength as to raise the issue of why the program is needed. This welcome reversal of fortune can be explained partly by the fact that the real estate slump that began in 2007 was so severe that a rebound was inevitable. But there are other reasons. Investors, recognizing an oversupply in many local markets, bought homes at rock-bottom prices and either have rented them out or sold them at a profit. Additionally, the general recession of late 2008-early 2009 was primarily the product of a financial sector collapse – banking, real estate, insurance and other financial services. Though severe, it did not spread to the entire economy. This, far more than any policies or programs advanced by the Obama administration, explains why economic growth resumed its upward path starting in the second half of 2009.
The subsequent decline in the unemployment rate and rise in consumer confidence have unleashed a lot of pent-up demand for home buying and improvement. Data released this week, part of the Standard & Poor’s/Case-Shiller Housing Index, underscore the strength of the upswing. The Index’s best-known component, a survey of weighted repeat sales of single-family detached dwellings in 20 U.S. metropolitan areas, revealed a 10.9 percent rise in real house prices this March over the previous March, the largest 12-month gain since 2006. February prices were 9.4 percent higher than they were a year earlier. Other indicators are encouraging as well. Interest on constant-rate, 30-year mortgages this year have hovered around 3.5 percent, though in recent weeks they’ve climbed into 4.0 percent territory. The Conference Board, a New York-based association of business leaders and researchers, this week reported its Consumer Confidence Index for May was at its highest level in five years. RealtyTrac estimated that for First Quarter 2013, the number of foreclosure filings (i.e., combined default notices, auctions and bank repossessions) reached a six-year low, declining 12 percent from Fourth Quarter 2012 and 22 percent from First Quarter 2012. And the National Association of Realtors estimated that homes sold this April had been on the market for 46 days, down from 83 days in April 2012. The median sale price, NAR noted, was $192,800, up 11 percent from a year earlier. And existing home sales continued their more than three-year climb.
Housing, then, has become more affordable even as prices rise. As we haven’t (yet) seen a rerun of the artificial credit explosion of the last decade, one can assume that most people are buying because they can. And the signs of a rebound have been around for some time. As Fortune magazine declared a little over two years ago: “Housing is back.” This begs the question: What is the need for the Home Affordable Modification Program? The Obama administration, for one, sees a great need. Today it announced a two-year extension for new HAMP applications beyond the scheduled expiration date of December 31, 2013. Treasury Secretary Jack Lew explained it this way: “The housing market is gaining steam, but many homeowners are still struggling. Extending the program for two years will benefit many additional families while maintaining clear standards and accountability for an important part of the mortgage industry.” But Rep. Jeb Hensarling, R-Tex., chairman of the House Committee on Financial Services, a critic of the program from the start, minced no words in his response. “This decision solidifies the Obama administration’s place atop the list of the nation’s biggest subprime lenders,” he said. “HAMP is a costly and abject failure that takes money from hardworking taxpayers, bails out banks that made bad loans, and forces Americans who struggle to pay their own mortgages to also pay their neighbor’s.” Hensarling is implying, properly, that even if HAMP were a model of efficiency, its main purpose still would be to offer ways of avoiding foreclosure that commercial lenders, left to their own devices, could offer, if on less favorable terms.
Nobody is suggesting that government shouldn’t punish acts of fraud and deception – and there was plenty of that before and during the housing recession. But HAMP and other subsidies invite overinvestment in housing in ways that invite another credit collapse. The Obama administration, steeped in an egalitarian mindset, views foreclosure as an injustice rather than as a way of enforcing property rights and aligning supply and demand. It’s the wrong frame of mind for these times.