For months now, the Obama administration signature foreclosure prevention program — the Home Affordable Modification Program (HAMP) — has been sputtering along, with more borrowers now getting booted out of the program than receiving a sustainable mortgage modification. In fact, many borrowers who enter the program wind up worse off financially, as the failure to obtain a permanent modification results in the borrower owing back fees and late penalties to the bank.
One of the biggest problems with the program is that the banks simply have no incentive to participate on a large scale, as they receive incentive payments for successful modifications but are subject to no repercussions for failing to keep qualified borrowers in their homes. Yesterday, the Special Inspector General for the Troubled Asset Relief Program (TARP), from which HAMP’s money comes, noted that just $600 million of the $50 billion allocated to HAMP has been expended, adding that “a program that began with much promise now must be counted among those that risk generating public anger and mistrust.”
Now, the program is designed to pay out incentives to mortgage servicers for every borrower that stays current over the next few years, so that would explain some of the delay. But it doesn’t explain why barely more than one percent of the money allocated to the largest Obama administration program meant to aid homeowners has actually been expended.
According to the latest data, which was released yesterday by the Treasury Department, about 466,000 borrowers have received permanent mortgage modifications under HAMP, while almost 700,000 trial modifications have been canceled. Another 30,000 people received a “permanent” modification, only to have it canceled. The program clearly needs some reworking.
And there are things that could be done to get more borrowers into sustainable modifications and to move the HAMP money out the door faster. For one thing, housing counselors could be given the authority to approve loan modifications, and if the banks don’t challenge the modification in three months, it would automatically become permanent. Paul Krugman wrote that such a move “would do a lot to clarify matters and help extract us from the [mortgage] morass.”
Yesterday, Paul Willen, a senior economist and policy adviser for the Federal Reserve Bank of Boston, said that recent anti-foreclosure efforts by the federal government have amounted to just “three years of failed policies.” “To prevent foreclosures we must pay lenders or borrowers a lot of money or force lenders to modify loans even when they don’t want to,” he said. “The idea we can go forward and all we need to do is tweak things a little or change a rule here or there or even change a lot of rules and give some incentive payments — that is not enough.”