According to the New York Times, the Obama administration is looking to revamp its foreclosure prevention program, the Home Affordable Mortgage Program (HAMP), which has been limping along for several months now. The expected changes will streamline some of the income verification procedures and may “include greater assistance for homeowners no longer able to make mortgage payments because their paychecks have shrunk.”
Calculated Risk was unimpressed, writing that the proposal “sounds like another delaying tactic.” And yes, simply streamlining some of the documentation issues on the borrower side doesn’t seem like it will do much good, considering how slowly even fully documented modifications are moving and the trouble (or lack of interest) that lenders have had getting their end of the deal in order.
But the Times also reported that the administration has “begun to consider a new push to reduce loan balances.” “They are looking at equity forgiveness,” said a financial industry executive who speaks regularly with Treasury officials. “There have been a lot of meetings on that.”
If true, this is a good sign, as “underwater” mortgages (where the homeowner owes more than the property is worth) are still a huge problem for which we have few solutions. According to the latest data, about one in four U.S. borrowers is underwater, and not only are most mortgage modifications not reducing principal for borrowers, but many are actually increasing the principal owed.
According to a new study from the State Foreclosure Prevention Working Group, a collection of 12 state attorneys general and three state banking supervisors, more than 70 percent of modifications are pushing borrowers further underwater:
Despite the growing number of loans that are “underwater” (where the homeowner owes more than the property is worth), only 9 percent of loan modifications in October 2009 involved reducing the unpaid balance by more than 10 percent. More troubling, more than 70 percent of modifications result in an increase in the principal amount owed. Given the correlation between negative equity and likelihood of default, the failure to write down principal in connection with loan modifications is a glaring flaw in the current crisis.
“The reality is that the housing bubble has burst,” said Mark Pearce, North Carolina Chief Deputy Commissioner of Banks, and those not addressing principal reduction as a means of reducing foreclosures are “close to being in denial.” Nobel Prize winning economist Joseph Stiglitz said today that a government priority should be figuring out how to write down loan principal.
This week has seen extensive discussion of regulatory reform and changing the way in which banks do business. But that won’t have much of an effect on people’s day-to-day dealings with financial institutions. Cutting principal, however, is something that directly and plainly affects people who are in trouble. And it will help the housing market, which, after all, is where this whole economic fiasco arose. The administration chose not to push for mortgage cram-downs, which would have helped with this problem, and hopefully it has learned its lesson.