We now know that HAMP was designed to fail from the start, and that the solutions which would have given it a chance, like teaming it with cramdown, ended up going nowhere. We also know that foreclosures continue to rise for beyond the rate of modifications, and that the implications for the greater economy are grave. So given the need for something to be done with the foreclosure mess, but the foreclosing (pardon the pun) of the most attractive options, what’s the next move?
Experts are a bit despondent on this point. “I query how much more effort HAMP is worth,” said Julia Gordon of the Center for Responsible Lending. “Proprietary modification data is looking a lot more like HAMP modifications these days,” she added, referring to the private modifications that individual servicers offer to their borrowers to save them from foreclosure. These private loan mods began outnumbering HAMP mods in March. And HAMP has sort of standardized the approach that servicers have taken to loan modifications, with the net present value calculation and the lowering of the monthly payment to a more affordable level.
The problem with private modifications is the lack of transparent data on these private modifications. The details on the back end may end up worse for the borrower, and certainly they are being pushed into these private mods on less favorable terms than HAMP, with the servicer holding tremendous leverage with the threat of imminent foreclosure.
Cramdown remains the likeliest way to solve these problems, to fix all the debt of a distressed borrower at one time. Many of these borrowers have staggeringly high debt ratios and end up in bankruptcy court anyway, and the same banks who hold the mortgages are taking major hits on their credit card write-downs, which keep skyrocketing. “Cramdown is the magic sword to cut down the Gordian knot, but politically it’s dead,” said Gordon.
She suggested two possibilities that could help at least a little. The first is a pre-foreclosure mandatory mediation between the borrower and the servicer. This is similar to what NACA (the Neighborhood Assistance Corporation of America) has been doing by bringing together both sides and getting same-day solutions for thousands of homeowners. The other suggestion from Gordon was an appeals process for HAMP. “An independent appeals board with authority could put the fear of God into the servicers, so at least they’d stop lying to the borrowers,” she said.
Though HAMP seems to be working toward its real goal of extending out the banks’ foreclosure problem, the borrower be damned, and an independent review board doesn’t seem to fit into that equation, this was closer to reality than you may think. Al Franken (D-MN) teamed with Olympia Snowe (R-ME) on an amendment to the Dodd-Frank bill that would have established the “Office of the Homeowner Advocate,” similar in design to the “Office of the Taxpayer Advocate” at the IRS. I’ll get into the details in a minute, but first the history of this amendment. It never got a vote in Dodd-Frank. However, Franken took it to the tax extenders bill, and the amendment passed 63-33, with bipartisan support. Unfortunately, the tax extenders bill ended up getting cut up and scaled down, and the Office of the Homeowner Advocate didn’t make it.
Franken’s office tells FDL News that they continue to seek a vehicle for the Office of the Homeowner Advocate. The tax extenders bill may come up again, and they would try to include it there. Sen. Franken is also working with the Treasury Department to enact part or all of the amendment administratively and without legislation, which is another possibility. Treasury has publicly come out in favor of the initiative.
The Franken-Snowe amendment would simply give borrowers somewhere to turn when their servicer loses their paperwork, or fails to give them a reason for rejecting their applications for HAMP, or breaks other rules of the program. Funded with HAMP money (they have at least $49 billion available), the Office of the Homeowner Advocate, according to Franken, would assist homeowners and counselors with all aspects of HAMP, and identify ways to make the program work better. It would have an independent director who cannot have career experience with a mortgage servicer over the past four years. And here’s the important piece: the OHA would be able to withhold incentive payments from servicers, or demand repayment, if they find the servicer to be in violation of the program. In other words, it’s an actual watchdog.
This will not solve all the problems with HAMP. But it would give the borrower a chance to at least get a remedy for some of the nightmares they experience in the system. Best of luck to Sen. Franken on getting this done.