I didn’t think much of the HAMP changes announced last Friday, but my pessimism mainly came from the fact that HAMP itself is an irreparably damaged program that nobody wants to use. There’s also the point that the GSEs are generally uninterested in a principal reduction program, and that has not changed. Ed DeMarco’s statement about the HAMP changes reflects that. It doesn’t seem like he’s warmed to the idea.
“FHFA’s assessment of the investor incentives now being offered will follow its previous analysis, including consideration of the eligible universe, operational costs to implement such changes, and potential borrower incentive effects,” said FHFA Acting Director Edward DeMarco in a statement Friday.
So while the incentives would in a perfect world get the GSEs reducing principal, in reality they probably won’t. This, by the way, is a legitimate criticism of the GSEs, in contrast to the Pro Publica article about Freddie Mac trapping high-interest borrowers from yesterday, which caught me at first but which was quite wrong, apparently.
But the expected lack of participation in the principal reduction encouragement under HAMP is the tip of the iceberg. Shahien Nasiripour finds that the HAMP tweaks will in all likelihood be even more ineffective than I suspected. The increased incentive payments for principal reduction, you see, will go to investors, who aren’t particularly resistant to the write-downs. The servicers, who MAKE MONEY OFF FORECLOSURES and lose money from principal reductions, get no further incentive to act. This baffled experts.
Analysts wondered why Treasury officials did not increase payments to servicers, the companies that collect payments and seize homes when borrowers default.
“Part of the reason why participation in this program has been so poor is because of the conflict of interest for servicers”, said Neil Barofsky, the former head of Sigtarp and a law professor at New York University.
“It’s more in [servicers’] economic interest to foreclose rather than put borrowers into a Hamp modification”, Mr Barofsky said. In the case of principal forgiveness, “one of the problems is that servicers are paid based on a percentage of the active principal. Principal reduction eats right into their bottom line.” [...]
Joshua Rosner, managing director at Graham Fisher & Co, said of last week’s announcement: “The structure suggests [administration officials] don’t really want it to work. They just want it to look like they’re doing something.”
HAMP never worked because of its behavioral economics focus to “nudge” servicers and investors into doing what’s right for the economy. The nudges are far too gentle to make a difference in the cold, rational economics of the situations. The servicers have financial incentives to foreclose instead of further modifications. And the new tweaks didn’t change that.
That leaves the GSE payments to induce them into modifications as the only part left that might help. This is effectively a payment to investors as well, but since Fannie and Freddie are such behemoths, they have more sway over the servicers to get what they desire. Unfortunately, they don’t desire principal reductions, and they’ve made that abundantly clear.
It’s bad enough that these changes come three years late. It’s worse that they will likely have no real effect.