EXTEND AND PRETEND: The Obama Administration's Failed Foreclosure Program
President Barack Obama's signature plan to combat the housing crisis has fallen short of its goals -- rather than significantly and permanently reducing home foreclosures, it is only delaying them.
The administration unveiled its Making Home Affordable plan in February 2009. Obama vowed in front of an audience gathered at Dobson High School in Mesa, Ariz., that MHA's signature effort, the Home Affordable Modification Program, would "enable as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure."
The $75 billion initiative -- $50 billion from the bank bailout, $25 billion from government-owned mortgage giants Fannie Mae and Freddie Mac -- was designed to induce lenders, servicers and investors to modify distressed mortgages through a series of cash incentives.
It's not working.
In its first year, 1.5 million people were invited to try HAMP. About 40 percent of those who tried it have been kicked out of the program; fewer than that have been given an actual shot at keeping their homes.
When President Obama took office, it took an average of 319 days to complete a foreclosure, according to Jacksonville, Fla.-based data provider Lender Processing Services. Now it takes 461 days.
Extending the process by which homes enter foreclosure allows banks to continue carrying the loans on their books at full value, delaying loss recognition. That allows unhealthy banks to appear healthy, staving off costly bank failures.
As a result, fewer homes hit the market in a distressed state. Home prices stopped their free fall.
"Extending and pretending was the right thing to do last year," says John Burns, a housing industry consultant based in Irvine, Calif. "It pains me to say that, but that's the situation they've got us into. Throwing these people out on the street and selling their homes would have depressed home prices."
The strategy has achieved stability for the housing market, but not for the people inside the houses. Families are merely given more time to wonder when sheriff's deputies will finally pile their belongings on the curb.
A Year Into HAMP, 'We're Losing Our Home'
Bea and Terry Garwood applied to JPMorgan Chase for HAMP help in April 2009 and were approved for a "trial" modification that July because they met the core requirements: their house payments took up more than 31 percent of their monthly pre-tax income; they lived in their home; they owed less than $729,000; and they were at risk of default. Garwood says the HAMP trial reduced their monthly payment on their two-story home in Pinckney, Mich., by nearly $500 to about $1,175 -- a huge relief, she adds.
A HAMP trial is supposed to become "permanent" after three months, but Garwood's dragged on for nine. "They kept on saying a bank statement was missing, or one of the documentations wasn't signed, or they didn't have the affidavit, or the hardship letter," Garwood says. "And then on March 19, I received a letter saying, 'You do not qualify for a permanent modification. You now owe us $12,000.'"
Chase rejected the Garwoods for two reasons, according to the letter Garwood received: The bank claimed their monthly mortgage payment amounted to less than 31 percent of their income and they failed HAMP's opaque "Net Present Value" test, a complex Treasury Department formula that servicers use to determine if a modification will make investors more money than a foreclosure. Garwood says that Chase assumed they had an inflated income by looking at deposits to their bank account and ignoring the money paid out to the people who work for her husband, a roofing subcontractor. If Chase went by the Garwoods' tax forms, she claims, the bank would realize they make thousands of dollars less every month and the couple would qualify for a permanent modification. Chase declined to comment.
Garwood says that the difference between their reduced payments during the trial period and what they would have paid otherwise, plus late fees, is $12,000. She says they can't possibly afford it all at once but that they would have found a way to make full monthly payments if they hadn't been lured into HAMP. They stopped making payments in April, shortly after they were turned down for a permanent modification. Sheriff's sales have been set for June, July, and now August. Garwood says she thinks she may be able to continue to dodge the foreclosure for a little while longer, but she's not exactly grateful for the extra time.
"They told us we were a great candidate, so we went for it," she says. "And as a result we're losing our home."
Treasury Department officials downplayed HAMP's role in the administration's foreclosure prevention efforts in an interview with HuffPost, insisting that the goal of helping three to four million people is broader than just HAMP or even the umbrella program under which it falls, Making Home Affordable.
"Foreclosure prevention was only one piece of the administration's approach to stabilize the housing market that included... interest rates at historic lows [for] increased affordability and refinancing, support for [Fannie Mae and Freddie Mac] to make sure there was a mortgage market available, and the homebuyer tax credit to stimulate demand," says Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office. "HAMP is one part of foreclosure prevention."
'Anemic' Number of Permanent Modifications
HAMP gives servicers and investors $1,000 incentive payments for permanent modifications, and additional payments each year that borrowers stay current. Through June, Treasury has disbursed just $247 million for successful modifications, according to a July 21 report by the Office of the Special Inspector General for the Troubled Asset Relief Program.
The TARP auditor called the number of permanent modifications "anemic."
"HAMP has not put an appreciable dent in foreclosure filings," SIGTARP's report to Congress notes. "[F]oreclosure filings have increased dramatically while HAMP has been in place, with permanent modifications constituting just a few drops in an ocean of foreclosure filings."
"There is some extending and pretending going on," says Celia Chen, an economist and specialist in housing for Moody's Economy.com. "Many trial modifications have failed to become permanent modifications. We're starting to see the number of REOs [bank-owned homes] rising."
During Obama's first three months in office, banks repossessed nearly 191,000 homes. In the three-month period ending in June 2010, that number jumped to 270,000 -- a 42 percent increase.
More than 529,000 homeowners have been kicked out of HAMP through June, Treasury figures show. About 1.2 million entered the program with a promise and expectation of permanent relief. Roughly 389,000 are benefiting from the "permanent" modifications guaranteed to keep their payments down for five years.
Lenders have repossessed more than three times as many homes during this time.
The Treasury Department rolled out the program quickly, and initially allowed servicers to put borrowers into trial modifications without solid documentation of their income -- a mistake that auditors of the program say inflated the number of people in trial mods that would never pan out. Every few months, Treasury released additional directives that, among other things, have expanded the criteria that servicers might use for income verification, from 4506-T tax forms and pay stubs initially to documents that reflect unemployment benefits and alimony payments.
Servicers frequently complain that such constant changes to the program make it difficult to administer, according to government auditors, including SIGTARP and the Elizabeth Warren-led Congressional Oversight Panel.
HAMP homeowners know a thing or two about delays and supplemental directives: Banks' requests to resend lost paperwork dominate complaints about the program. Of the 364,077 trial plans, 166,000 have dragged on for longer than six months.
Teresa Follmer, an interior designer in Mesa, Ariz., tried over a year to modify her mortgage with Countrywide (now Bank of America) before discovering that she'd met HAMP's eligibility requirements in May 2009. But when she tried to apply, Countrywide told her it didn't do HAMP mods, according to a lawsuit filed in federal court in July. After Follmer called the Arizona Department of Financial Institutions to complain, a Bank of America executive got in touch and initiated a long series of back-and-forth discussions.
Many unhappy HAMP recipients have similar stories to the one outlined in Follmer's lawsuit: In response to the executive's request, Follmer compiled personal financial information and sent it to the bank, which acknowledged receipt the following day. A week later, Bank of America sent Follmer a notice of its intent to foreclose on her home. The bank then advised Follmer to gather up her financial information again and resubmit her application. In October, she received a package indicating her HAMP trial would begin -- and another package days later asking her to send additional paperwork. In January, Bank of America asked her to send a missed payment (which she denies she missed) and yet more documentation. In February, the bank thanked her for making payments and asked her to send her pay stubs and her tax returns (again). In May, Bank of America said it would foreclose because Follmer missed trial payments. When Follmer protested, she was told she could start her trial period all over again. But then in June, the bank told her she owed $23,988 and would lose her home if she didn't pay.
Follmer's suit, one of several across the country seeking class-action status, alleges that Bank of America "regularly falsely informs borrowers that it did not receive requested information and demands that documents be re-sent."
A Bank of America executive acknowledged the paperwork problems in June: "We continue to train and retrain to try to improve our process and we've done a lot of things to try to make sure we don't lose documents anymore," he said during a conference call with reporters. "We do think the experience is getting better and better, but again, it's still not the level we would hope it to be because we still have more customer complaints than we believe are acceptable."
Homeowners in New York City sued JPMorgan Chase for allegedly telling them to quit making payments in order to qualify for the program (similar suits have been launched against Chase in California and Seattle). "I trusted them because they're a big bank. I did whatever they asked me to," plaintiff Alex Lam told HuffPost. "Just to get a modification, that's all I'm asking for... Since day one, that's all I'm asking for."
The Government Accountability Office notes in a June 24 report that Treasury had yet to fine a single servicer for noncompliance. In fact, Treasury had yet to even formalize its penalty scheme. The GAO says that Treasury's lack of clear consequences "risks inconsistent treatment of servicer noncompliance and lacks transparency with respect to the severity of the steps it will take for specific types of noncompliance."
Treasury's enforcement of the rules has been limited to prodding servicers to do better, and requiring them to review borrowers' applications. While Treasury has the contractual right to claw back payments made to servicers, it has yet to do so. The agency declined to offer reasons why it has not done so.
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