The second-ranking Democrat in the Senate expressed concern Thursday over the ultimate effectiveness of the Obama administration's signature foreclosure-prevention effort, becoming the highest-ranking member of the president's party to publicly question the administration's efforts to help struggling families.
The administration announced in March that its initiative, the Home Affordable Modification Program, will begin in several months to help unemployed homeowners and those who owe more on their mortgage than their home is worth. The unemployed are eligible for temporary relief from monthly payments; underwater homeowners are eligible for reductions in mortgage principal.
In a Senate hearing, Assistant Majority Leader Dick Durbin told Treasury Secretary Timothy Geithner that he's "concerned that these changes don't go far enough to help unemployed and underwater homeowners."
"Under the current plan, servicers may still have more incentive to foreclose rather than to modify mortgages, and many borrowers will still find that default may be easier than staying underwater," the Illinois Democrat said. "These changes won't be implemented until the fall, and may be too little, too late."
Research shows that underwater homeowners are much more likely to default on their mortgages than similar borrowers who have positive equity. In fact, the more underwater homeowners are, the more likely they are to fall behind on payments, default, or to walk away from their mortgage debt completely. That's why so many groups -- consumer advocates, homeowners, members of Congress and mortgage bond investors -- have called for a more robust principal reduction effort by Treasury.
"[W]e have heard from servicers that whenever principal reduction is included as a component of the modification, even at the same debt-to-income ratio, the outcome is more sustainable," said Richard H. Neiman, New York state's chief bank regulator and a member of the Congressional Oversight Panel, a federal bailout watchdog. "This highlights the importance of incorporating broad principal forgiveness into foreclosure mitigation programs."
HAMP is part of the administration's $75 billion effort to stem the rising tide of foreclosures.
An April 14 report by COP found that more than three-quarters of homeowners who have had their monthly mortgage payments reduced under HAMP owe more on their mortgage than their house is worth. Citing data through February, over half of the roughly 170,000 distressed borrowers who had gone through the program were seriously underwater, meaning they had negative equity of at least 25 percent, the report notes. In other words, for every $1.00 their home was worth, they owed at least $1.25.
The average homeowner who's received a five-year modified mortgage under the administration's plan had negative equity of about 35 percent prior to the program, according to the report. After modification, that burden actually increased for the average homeowner, who is now underwater by more than 43 percent.
Durbin asked Geithner about that. Geithner dodged the question. The Treasury Secretary did note, though, that the modifications lead to lower interest rates for borrowers, which results in lower payments. Still, that doesn't address negative equity, which is what Durbin asked about.
Yet the watchdog's report actually understates the problem, the report notes. Its figures are for first-lien home mortgages only. Debt owed on junior liens, like second liens and home equity lines, isn't part of that calculation. The Obama administration estimated last April that "up to 50 percent of at-risk mortgages currently have second liens."
"If junior liens were to be included, the percentage would be significantly higher," the report notes. "The continuing deep level of negative equity for many HAMP permanent modification recipients makes the modifications' sustainability questionable; even with more affordable payments, deeply underwater borrowers may remain tempted to strategically default or may be compelled to because core life events, such as death, divorce, disability, marriage, child birth, job loss, or job opportunities necessitate a move."
Geithner pointed to the roughly 230,000 homeowners who now have lower monthly payments as a result of the program, and the 1.4 million homeowners who have been offered the opportunity to have lower monthly payments.
By comparison, last year lenders foreclosed on more than 2.8 million homes, a record, according to real estate research firm RealtyTrac. The firm estimates three million homes will get foreclosure notices this year; more than one million of them will be repossessed by lenders.
Kevin R. Puvalowski, deputy Special Inspector General in the Office of the Special Inspector General for the Troubled Asset Relief Program, another federal bailout watchdog, said Treasury has fallen short in its promise to help struggling homeowners.
"[U]ntil Treasury fulfills its commitment to provide a thoughtfully designed, consistently administered, and fully transparent program, HAMP risks being remembered not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals, and meager results," he told Durbin's subcommittee.
Neiman said that "the stories we hear point to a clear need for a Homeowner's Advocate, or ombudsman, within Treasury. Treasury's currently offered email address is not doing the job."
Geithner predicted "a lot of hardship and pain still ahead" for homeowners.
"Foreclosure prevention is not just the right thing [to] do for suffering Americans," Neiman said, "but it is the linchpin around which all other efforts to achieve financial stability revolve. We cannot solve the financial crisis without dealing with the root of the problem: the millions of American families who are at risk of losing their homes to foreclosure."