For months now, the Obama administration’s Home Affordable Modification Program (HAMP), which is meant to facilitate mortgage modifications for troubled borrowers, has been sputtering along, with more borrowers dropping out of the program than receiving permanent modifications. Banks have been reluctant to go along with the program, as it includes no stick when they fail to provide a modification for eligible borrowers. Alternate programs meant to cut loan principal (the outstanding loan amount) have also been slow to get up and running.
As Shahien Nasiripour pointed out, according to a recent Government Accountability Office report, the average homeowner in HAMP “owes their mortgage lender more than $1.50 for every dollar their home is worth, which means they fall into the stratum of homeowners most likely to simply walk away from their mortgages.” This has led a duo of Republican lawmakers to call for ending the program “immediately,” and to advocate leaving borrowers at the mercy of private modification programs:
“It defies common sense that taxpayer money is being used to pay banks to modify loans that are likely to default anyway,” said Rep. Darrell Issa (Calif.), the ranking Republican on the House Committee on Oversight and Government Reform. “In cases where loan changes could keep borrowers out of foreclosure, banks have a clear incentive to make changes without a need for public funds”…Issa and [Rep. Jim] Jordan (R-OH) argued that homeowners and taxpayers would be better off in private modification programs.
Despite all of HAMP’s troubles, private modification programs are likely to be much worse, leaving homeowners up to the whims of banks that can’t even keep their borrowers’ documents straight. As Tim Fernholz pointed out, private modifications “don’t usually lower monthly payments enough to keep borrowers in their homes. Even the best industry modifications [only] attempt to make mortgage payments 38 percent of monthly income.”
“What [the industry] calls a loan-modification is really a workout plan. It is designed to bring their arrears up to date because of a one-time economic dislocation,” said Kathleen Day of the Center for Responsible Lending. “That is not a remedy for someone who holds a loan that is fundamentally flawed and unaffordable.” Diane Thompson, a lawyer with the National Consumer Law Center, said that homeowners would be worse off 90 percent of the time if they were forced into private modifications instead of public.
HAMP has absolutely been a disappointment and desperately needs some fixes if it is ever going to achieve the administration’s stated goal of keeping millions of homeowners in their homes. But abandoning any attempt to help borrowers who were buried by the bursting of the housing bubble will only result in more foreclosures and blighted neighborhoods, thus prolonging our economic difficulties.