So Ezra stepped out and pretty sharply criticized HAMP. To him I say welcome. But because he has a Beltway audience, the Treasury Department got right angry and dialed him up and pleaded their case. Let’s take a look.
• The “But We Did Something!” Argument: Phyllis Caldwell offers:
Phyllis Caldwell: You have to think about HAMP in the context of who it was supposed to help and why. It set a framework for evaluating mortgage modifications that moved the industry to a standard modification able to reduce payments and gave more than a million homeowners immediate relief through trial modifications that had the potential to become permanent. So what it set out to do worked. What has been disappointing were the number of people who qualified for modifications. Some of them were not who the program was meant to serve. They were already paying less than 31 percent of income on their mortgage or they could not verify the income they said they had or they could not keep up with payments during the trial period.
Just because we said we’d help 4 million people, and we’ve ended up with only 10% of them getting a permanent modification, that’s not our fault. It’s those damn people! They were the wrong kind!
Basically they say that HAMP cannot help people who have fallen off in their mortgages due to unemployment, and was designed for subprime buyers who were scammed in the marketplace or ended up with big rate resets. They’re implicitly saying that HAMP was designed for a housing market in March 2009 and not October 2010. But if that were the case, they wouldn’t be 90% off their expected totals.
Also, if HAMP wasn’t set up to address unemployment or negative equity, since those are the major problems, maybe something should be created to do that. HAMP has spent under 1% of its $50 billion dollar allotment through TARP, it’s not like there isn’t any money laying around.
• The “I Know Nothing, I See Nothing” Argument: Caldwell then states that nobody was hurt by the tragic design of the program:
Q: A criticism of HAMP is that its three-month trial period ended up hurting a lot of people. They got their payments lowered for a few months and then their bank just left them hanging, or they got kicked out, and now they had to pay the difference, or they’d been holding on in a community with no jobs for longer than they needed to.
PC: There are instances of that. It’s important to remember that the focus was for people who wanted to stay in their homes and there may have been some cases where people believed or hoped that their circumstances would change and so they stayed in the trial hoping their circumstances would change but they didn’t. But it’s not fair to say they are worse off than they were because of HAMP. They owed what they would’ve owed anyway.
Actually, it’s almost criminal to say that people aren’t worse off because of HAMP. They simply are. I’ve chronicled people who made every payment they’ve been asked to and still lost their home. I’ve talked to people who had their trial modification stretched out and then ended up with both a bad credit report because the reduced payment read as a default, and a lump sum owed at the end of the trial after getting cancelled without a viable reason from the servicer. I’ve talked to people who lost their homes basically because they missed a single document. There aren’t “instances,” it seems to be a feature of the program. The servicers have little motivation to help people, deal with confusing rules and in the end don’t fulfill their obligation to keep people out of foreclosure or provide a valid reason for foreclosing.
• The “We Can’t Help Deadbeats” Argument: Steven Adamske says:
SA: There’s a moral hazard in this issue as well. Your editors and people in your industry would be salivating for the Lexus owning and beachfront property types who would get help if we opened the program further. We have to go for a middle ground where we get the people deserving of help so there’s no accusation of free lunches. The challenge is figuring out how to scale a program so you’re doing enough and trying to address the problem without doing so much that you create a big moral hazard problem and use taxpayer money unwisely. That’s why we only paid out funds when there was success. That helped us be responsible. So we still think it was properly designed, given the need to scale it in that way.
There were a record number of foreclosures last month. And a record in the third quarter. Before that a record in the second quarter. Do you think this obsession with “free lunches” is really working out on the central issue of preventing foreclosures? If you think you’ve properly designed and scaled this program in the midst of historic numbers of foreclosures and evictions, you… well, you’d have to be a flak for the program, I guess.
• The “Our Hands Are Tied” Argument: Caldwell then says that it’s up to the investors to allow modifications to the loans, so, sorry, people:
PC: When we talk about HAMP or mortgage modification, it’s important to know that only 15 percent are owned by banks. The rest are Fannie, Freddie and investors. People see it as the banks not modifying, but it’s really banks and servicers working on behalf of investors. And then we need to include the effect HAMP has had on the industry in creating a model for reducing payments on mortgages. Before HAMP, only a third of modifications were reducing payments. Now it’s above 70 percent.
Mark Paustenbach: And you know why the program was voluntary, right? We didn’t have the authority to unilaterally open up these contracts and change them. That would’ve been illegal. So we needed a program where we could get the servicers to participate and agree to do the modifications voluntarily.
That’s just completely untrue. In a situation of principal reductions, that’s possibly the case, but about .01% of HAMP mods, about 400 out of 400,000, reduced principal. Most of them changed the terms of the loan or reduced the interest, which is totally in the purview of the servicers, aka the banks. By the way, we’re nearing a point in the foreclosure/title mess where the investors would be THRILLED to get a modification and lose 20-30% of the principal of the loan, over a foreclosure that loses 70%, or absolutely nothing because the title is unclear.
• The “Effect on the Industry” Argument: This is alluded to above. It’s the idea that the industry has a standard model now for reducing payments on mortgages that they didn’t have before. First of all, to the extent that they do, it’s probably as much a result of the efforts of NACA, as HAMP. Second, the terms of private alternative modifications are largely unknown and opaque, so it’s hard to call them a model, but what we do know is that the terms are worse than HAMP. They don’t have to be over the life of the loan, and they certainly don’t reduce principal. Indeed, from what I know of the alternative mods, they look like ARMs that will recast in 3-5 years, and we can go through this whole damn thing again.
Caldwell tries to finesse this here:
PC: Remember that private mortgage modification has changed a lot in part because of HAMP. It set a framework for that. Within the HAMP program, over 1.3 million have had a chance at modification. But when you look beyond HAMP at the private mortgage modification industry, modifications continue to exceed foreclosure sales on a 2:1 basis. Modifications have worked. But they can’t stop foreclosures totally because there are some people for whom it’s not avoidable. So the number of people eligible for a HAMP modification was less than we thought at the beginning, but a lot of people have been helped, and we’ve moved the modification industry from being somewhat predatory to stable and helpful.
Note “foreclosure sales” in that statement, not “foreclosures.” This completely discounts the fact of shadow inventory, and the holding back of foreclosed homes from the market. It’s fun with math.
• The “Cramdown Wasn’t Feasible” Argument: Adamske says that “When you talk about forced bankruptcy modifications [like cramdown], it failed in Congress. It wasn’t politically feasible.” Maybe the President should have mentioned that when he took it out of TARP and then out of the stimulus, after promising it for years.
All in all, this is an absurd set of justifications. It ignores the very real design flaws in HAMP, it tries to excuse the voluntary nature of the system, it neglects the fact that the incentives for modification in the program are completely upside-down, and it shades the truth (at best) on the statistics. Meanwhile, the unchecked rate of foreclosures are a lead weight on the economy. Don’t break your arm patting yourselves on the back, guys.