Back in August, the Treasury Department produced a list of mortgage servicers and their progress (or lack thereof) in successfully getting eligible borrowers into the administration’s signature mortgage modification effort — the Home Affordable Modification Program (HAMP). As the Associated Press reported at the time, “by publishing the names of companies that are lagging behind in the government’s plan to ease the housing crisis, officials are counting on public outrage to get the industry on track.”
Though conservatives freaked out about the public naming (with Neil Cavuto slamming Treasury for writing a “cockamamie scarlet letter list“), public outrage did not work the wonders that it was supposed to. Some banks are still enrolling borrowers at a snail’s pace, and as Andrew Jakabovics and I reported last week, Bank of America is even siphoning borrowers off into its own private modification program, in violation of HAMP guidelines. 650,000 borrowers have received trial modifications under HAMP, and just 1,711 of those have received permanent modifications. Meanwhile in the third quarter of this year alone, 937,840 homeowners received a foreclosure letter.
If foreclosures continue unabated, economic recovery is going to be delayed even longer than it otherwise would have been, and Treasury clearly recognizes that it needs to do something. The new strategy? Scold the banks again:
“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be”…Mr. Barr said the government would try to use shame as a corrective, publicly naming those institutions that move too slowly to permanently lower mortgage payments. The Treasury Department also will wait until reductions are permanent before paying cash incentives that it promised to mortgage companies that lower loan payments.
As Tim Fernholz put it, “unfortunately, I don’t think shame will be enough to change these banks’ behavior (what, are they going to become less popular?) and withholding cash payments will probably be an incentive for the banks to stop doing the modifications altogether.”
Since its inception, HAMP has been hobbled by the lack of enforcement mechanism to use against banks that violate or slowfoot their way through the program. Some servicers have gotten upwards of forty percent of their eligible borrowers into trial modifications, proving that there is little excuse for the servicers which are still struggling to break into double digits. There is simply no reason for them to accelerate their efforts, as opposed to bogging homeowners down in an endless sea of paperwork and documentation requests.
Treasury is not suffering from a shortage of options for turning things around. It could implement right-to-rent, or try to spark an interest in reviving cram-downs, which were envisioned as the stick in Treasury’s plan before going down in flames in the Senate. It could also push Congress to support mandatory mediation programs across the country, which mandate that a servicer meet with the borrower before finalizing a foreclosure. Such programs have been quite successful at mitigating foreclosures, particularly once they’ve been underway for a while.