By Nick Timiraos
A series of data and reports this week begs the question: Has the Obama administration’s signature effort to help prevent foreclosures been a total flop—or just a partial one?
On Tuesday, the administration released another disappointing report on the Home Affordable Modification Program or HAMP. The report showed that in June, the number of homeowners with modifications that fell out of the program was more than double the 39,000 new homeowners who began modifications.
- Matt McLoone for The Wall Street Journal
- ‘I AM NOT DECEASED’: Sarah Larson was asked for a copy of her death certificate as she tried to modify the mortgage of her Minneapolis home.
Part of the attrition has to do with the flawed way in which bureaucrats structured the program. To get a permanent modification, homeowners must complete a trial period where they make their reduced payments for three months. So far, so good. But in a bid to ramp up the program quickly, the government initially let banks approve trials without making sure borrowers could provide supporting documents to qualify. Eventually, dropouts should slow down because banks are now asking for that paperwork up front.
At the same time, tougher upfront standards mean that the number of new trial modifications will slow. During the second quarter, new trials were up 6.5% from the first quarter, compared to quarterly increases of 20% and 40%, respectively, in the previous two quarters.
When it was announced in February 2009, President Barack Obama said HAMP would help three to four million homeowners. Under the program, 1.3 million homeowners have received trial modifications, but 41% of those borrowers have dropped out before getting a permanent modification. Another 28% are still in the trial period, and nearly half of those trials have been active for more than six months. That leaves some 390,000 active permanent modifications.
On Wednesday, the administration took fire from two bailout watchdogs that are critical of the program. Neil Barofsky, the special inspector general for TARP, dinged the administration for not outlining more clear goals:
Treasury’s continuing indications that this is a successful program without identifying these goals and benchmarks is simply not credible, and I fear that the growing public suspicion that this program is an outright failure will continue unless and until Treasury adopts this recommendation and comes clean with what its goals and expectations are.
Mr. Barofsky’s report showed that of the $40 billion allocated for HAMP, just $250 million has been spent on the program so far.
So how big a flop is HAMP? Today’s Journal explores the absurdity that has roiled borrowers who try to get help. Other stories have noted the fact that modifications still face a high re-default rate, largely because borrowers still have heavy debt loads. Some borrowers have found themselves worse off because they do everything possible to get a trial modification, only to be turned down.
Housing economist Thomas Lawler offers this succinct critique of HAMP:
[T]he absolutely clear facts are that the administration massively over-estimated the number of troubled home borrowers who either could qualify for a permanent HAMP mod or wanted one; were taken aback by the number of borrowers who didn’t provide sufficient documentation; and were very surprised by how many troubled borrowers had a front end debt-to-income ratio below 31% (this was apparently the number one reason why homeowners applying for a HAMP trial mod were not granted one). To be fair, the administration relied heavily on servicers’ (and others’) input in designing the HAMP, and, as we now know, servicers knew almost nothing about borrowers whose loans they serviced. Still, the HAMP in terms of borrowers receiving a permanent modification has been hugely disappointing, and any valid scorecard would highlight this.
But that doesn’t necessarily mean HAMP should be written off as a total flop, even if it has been a big letdown. Here’s why:
First, the program shook the mortgage industry by the lapels into doing something to help homeowners, and to do it (relatively) quickly. It also created an industry standard for modifications that resulted in lower payments without leaving borrowers with more debt. (It’s often overlooked that before HAMP, many modifications weren’t terribly helpful). That should lead to lower re-default rates.
Second, HAMP has forced the industry to hold off on foreclosures by working to modify loans or seek other alternatives, such as a short sale, where the lender allows the home to sell for less than the amount owed. That has held down bank-owned inventory, allowing home prices to exit their freefall, even though it could lead to a more drawn out home-price bottom.
Finally, for its many shortcomings, HAMP has helped hundreds of thousands of borrowers so far. Contrast that with the two previous government programs—FHASecure and Hope for Homeowners—and HAMP looks a lot better.
Readers, what grade would you give to HAMP?
