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July 28, 2009
BY ANDREW JACABOVICS - Center for
American Progress
Homeowners across the country facing
foreclosure are still having a difficult time
getting help with their mortgages despite the
Obama administration's efforts to reduce home
foreclosures through its Home Affordable
Modification Program (HAMP).
That’s why representatives from the nation’s
top mortgage servicing companies will be called
to the carpet later today by senior officials
from the departments of the Treasury, Housing,
and Urban Development to defend their
performance record under the HAMP program.
The invitation to the meeting, described by The
New York Times as an ultimatum, was sent as a
joint letter signed by Treasury Secretary
Timothy Geithner and HUD Secretary Shaun
Donovan expressing not-so-veiled frustration
with servicers' lack of effective mortgage
modification action to date.
Nor are Geithner and Donovan the only ones who
are disappointed. At a recent Senate Banking
Committee hearing, the frustration was
bipartisan.
As of mid-July, there were 160,000 trial
mortgage modifications made by servicing
companies, with another 165,000 offers
outstanding.
This number pales in comparison to the more
than 1.5 million properties that received a
default or foreclosure notice in the first half
of the year. Foreclosure activity in the second
quarter reached new highs even as the program
was under way.
Unfortunately, while embattled homeowners did
respond-MakingHomeAffordable.gov has had 27
million page views-servicers promised to
participate but seemingly failed to
deliver.
That leaves the Obama administration with two
options. The first is to improve mortgage
modification outcomes under HAMP. And the
second is to lay the groundwork for additional
policies to prevent unnecessary
foreclosures.
In order to improve HAMP outcomes, we need to
understand why modifications aren’t happening
at the rate we would like. Unfortunately, the
lack of transparency in the program makes it
difficult to determine where the points of
failure lie.
A Government Accountability Office report
released last week, for example, found “The
lack of adequate documentation and
specification of the assumptions makes it
difficult to assess the reliability of
Treasury’s estimates and, going forward, may
hinder efforts to evaluate how well the program
is meeting its objectives.”
HAMP calculates whether a modification is more
valuable to the mortgage holder than going
through foreclosure.
But the formula is not publicly available,
which limits everyone’s ability to determine
and debate whether certain choices and
assumptions built into the model are
appropriate. That's like trying to diagnose why
a car won’t start without looking under the
hood.
There is a growing chorus of consumer
advocates, academics, and investors who want
HAMP to promote principal reductions over
interest rate cuts.
The monthly payment on a mortgage can be
lowered to 31 percent of income by reducing
principal just the same as by reducing the
interest rate.
Since negative equity in the property is highly
correlated with default, principal reductions
should reduce default risk on the modified
mortgages and make modification the preferred
alternative to foreclosure.
In trying to understand why more modifications
aren’t happening, many roads lead back to the
mortgage servicing companies. Banks have
increased staff levels in their servicing
departments, but servicer capacity and training
seem to be the biggest roadblocks to
success.
Next week the first of monthly scheduled
reports from Treasury will break out
modification activity by servicer and will
allow us to determine whether there are flaws
in the program itself-if servicers across the
board have low rates of modification-or whether
individual servicers are lagging behind.
Unfortunately, enforcement is another area
where expectations for HAMP are falling
short.
Treasury recently announced it is working with
Freddie Mac to develop a “second look” program
to make sure that borrowers are not wrongly (or
wrongfully) turned down for a modification.
Early indications are that the second look at
rejected applications is flagging far too many
cases where a modification should have been
offered.
Even so, the program lacks a formal appeals
process. Borrowers who get rejected from the
program often get no explanation of why they
were turned down, which is itself a potential
violation of the Fair Credit Reporting Act.
There is no opportunity to challenge any of the
servicer’s assumptions, such as the value of
the property or the accuracy of the homeowner’s
credit score, both of which have tremendous
bearing on the outcome of the net present value
test.
The Center for American Progress strongly
believes that requiring mediation prior to
foreclosure for all loans serviced by HAMP
participants will improve program outcomes.
Improving HAMP processes may only get us so
far, however. If some loan servicers truly lag
far behind their peers, then it will be
necessary to act more aggressively.
While participation in HAMP is voluntary, and
changes to the terms of the contract allow
servicers to opt out of the program, Treasury
still has the upper hand in most cases. The
largest servicers are all recipients of the
$700 billion Troubled Asset Relief Program, and
many of them are looking to pay back the TARP
funds to get out from under the government’s
thumb.
In addition to paying back the TARP money with
interest, there are also outstanding warrants
whose value is open to negotiation. Treasury
can use those negotiations over the value of
the warrants as an opportunity to improve
HAMP.
One idea: allow Treasury to buy out (at a
discount) the servicing rights of
underperforming servicers or even acquire them
outright in exchange for some of the
outstanding warrants. Treasury could then
resell those rights to the servicers who do a
better job.
Bankruptcy reform is not the only avenue for
congressional action. As of the end of last
year, half of all seriously delinquent
mortgages were in privately issued
mortgage-backed securities, despite being only
15 percent of the outstanding mortgages.
By way of comparison, Fannie Mae and Freddie
Mac had a combined 56-percent market share but
only 20 percent of the delinquencies.
Mortgage-backed securities are issued by
special trusts known as Real Estate Mortgage
Investment Conduits, or REMICS, which have no
tax liabilities.
Congress could change the tax code to eliminate
that valuable benefit for any REMIC holding
more than a certain percentage of defaulted
mortgages. This would provide a strong
incentive to either modify mortgages or allow
borrowers to refinance into Hope for
Homeowners, a program designed to allow
underwater borrowers to refinance into Federal
Home Administration mortgages based on the
current value of the property.
Economists and policymakers alike have
recognized that solving the housing crisis is
the key to economic recovery, and HAMP lies at
the center of those efforts.
Andrew Jakabovics is the Associate Director
for Housing and Economics at American
Progress.
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