Before I release the latest Portrait of HAMP Failure, I thought it would be worth taking a look back at how we got here, how we ended up with a federal loan modification that operates entirely at the discretion of banks, which they have used to extend and pretend, and to trap borrowers into accepting unfavorable terms or lose their homes. This history wasn’t well-known to me until some conversations and interviews I conducted over the past several days, but I think it’s crucial to understanding the failures of HAMP, and the next steps.
The origins of HAMP go back to the debate around TARP. In September 2008, the banks were melting down and needed emergency legislation to survive. They were prepared to fight, but ultimately accept, a great deal of concessions or conditions in order to secure the deal. This especially was the case after the House rejected the first version of TARP that September. The Democrats controlled Congress and Republicans controlled the White House, though they were lame ducks and fairly desperate to get something passed to save the financial system and their legacy.
At one point, the banking industry basically accepted that they would have to deal with cramdown, where bankruptcy judges would be authorized to modify the terms of primary residence mortgages, the same way they can with secondary homes or yachts or cars or practically any other asset. They were willing to take this along with their bailout. But around this time, then-Senator Barack Obama and John McCain came off the campaign trail and returned to Washington. Suddenly, the deal Obama eventually supported and whipped pushed off the question of cramdown until after the elections. Donna Edwards in this statement explains the precise promise she thought she secured from Obama in voting for TARP:
“After speaking with Senator Barack Obama yesterday and with many of our retirees, workers, homeowners and small business owners, I am convinced today that even left with this imperfect product, the choice is this or nothing. For me, doing nothing was never an option. I appreciate the personal commitment that Senator Obama made to me that we will work to provide direct relief to homeowners facing foreclosure by enabling home mortgages to be dealt with in the context of personal bankruptcy and looking at a program such as one that existed in the 1930’s to 1950’s to work directly with homeowners to mitigate foreclosures. I look forward to working with the leadership and the President to protect homeowners and stabilize our economy. Finally, I understand that this is the beginning of our work to stabilize our economy and prepare for our future-creating jobs, rebuilding our infrastructure and setting important priorities for health care, energy independence, and prosperity for working families.”
Basically, Edwards cites two things: cramdown, and what eventually became HAMP. Obama promised to get both done quickly after the election, when he was President.
After that, the banking industry fully expected cramdown to go into the stimulus, or some other early bill of the Administration. After all, they made the promise, and during the transition, Obama officials vowed to keep to it. Banks actually held meetings and conference calls assuming cramdown would happen. They began to prince it into their models for the future.
But in January, the stimulus revealed by the President’s team did not include cramdown. It didn’t include what would become HAMP, either. Consumer advocates were stunned by this turn of events. But they had another leverage opportunity. The second tranche of TARP funds had to be delivered, and members of Congress could hold that $350 billion back unless they secured another promise for a comprehensive housing policy. Larry Summers wrote a letter to Harry Reid on January 15, 2009, promising exactly that:
The Obama Administration will commit $50-$100B to a sweeping effort to address the foreclosure crisis. We will implement smart, aggressive policies to reduce the number of preventable foreclosures by helping to reduce mortgage payments for economically stressed but responsible homeowners, while also reforming our bankruptcy laws and strengthening existing housing initiatives like Hope for Homeowners. Banks receiving support under the Emergency Economic Stabilization Act will be required to implement mortgage foreclosure mitigation programs.
Jeff Merkley talked about this letter directly on the panel I shared with him at Netroots Nation, and he said it provided the basis for him to vote for releasing the second tranche of TARP funds. He received this commitment verbally and in writing.
Still, cramdown didn’t get into the stimulus. And in a later housing bill, the Obama Administration stood mute at Dick Durbin tried and failed to get cramdown passed in the Senate. This is when he blurted out that the banks “own the place.”
In fact, the banks essentially created HAMP. It was their counter-offer to cramdown, their attempt to put a foreclosure-mitigation scheme friendlier to their interests in place. Under the proposal, the banks would be allowed to work out their terms with borrowers first, before resorting to a bankruptcy judge. This is how it worked in the House version of cramdown, which passed in March 2009; the homeowner had to negotiate a voluntary loan mod with the lender before going to the bankruptcy judge. And this may have worked, but only because, for the servicers, cramdown would have loomed in the background as a big stick, forcing a negotiation with a level playing field for the borrower.
Instead, you ended up with a voluntary program that provided meager incentive payments to the servicers, but didn’t force them in any way to work out terms. You got all carrot but no stick.
In addition, because of the promises made and because of the surge in foreclosures at the end of 2008, according to Julia Gordon of the Center for Responsible Lending, the Administration had to roll out HAMP program right away, before it was actually fully ready. “They would announce a program but the guidelines wouldn’t be ready, and they did this repeatedly for an entire year. The servicers would get beseiged with calls and they didn’t know what to do.”
Some of these changes filled in the gaps of the initial HAMP, some of them were tweaks that responded to criticism of the plan’s design. But it had the effect, by layering these new rules on top of one another, of creating mass confusion in the industry and its bureaucracy. “Not that I have much good to say about the servicers, but for all the capacity issues in the industry already, this exacerbated that,” said Gordon.
Because there was no mechanism in the program to hold the servicers to account, some of the new tweaks were designed to try and force loan modifications. “These people (at Treasury) are used to having someone listen to them,” Gordon told me, but the servicers were extremely reluctant to actually modify terms. The problem is that, from the start, HAMP was a voluntary program, so Treasury felt the need to thread the needle, and come up with a fix for the program without scaring the servicers off, so they wouldn’t drop out entirely. Many find this to be merely a rationalization on the part of Treasury to justify pulling their punches, arguing that the banks had no opportunity from a PR standpoint to drop out of the signature program helping borrowers facing foreclosure.
And that’s basically the history. That’s why we have banks selling homes out from under the homeowners. That’s why we have hundreds of thousands of borrowers accepted for trial modifications in demonstrably worse financial shape than when they started, once their applications get rejected. That’s why we have this mass confusion from the public on which of the alphabet soup of programs fits their needs, and why so many of the refinancing and short-sale options have been so vastly underused. You had two programs designed to work in tandem and only ended up with one. It should be no surprise that this resulted in failure.