EXTEND AND PRETEND: The Obama Administration's Failed Foreclosure Program
Analysts say there's little chance HAMP will meet Obama's original goal.
Chen of Moody's Economy.com estimates that HAMP will ultimately save about 500,000 homeowners from foreclosure, she wrote in a July 21 note to clients. Sharga says it's likely to help just 10 percent of the homeowners the administration initially sought to save.
In June, analysts at Fitch Ratings projected that as many as 75 percent of HAMP homeowners will ultimately re-default -- despite the lower monthly payments. Last month, analysts at Barclays Capital said they project a 60 percent re-default rate.
Through March, federal bank regulators report that about 7.7 percent of HAMP homeowners were 60 or more days delinquent on their modified mortgages three months after the modified mortgage took effect. Overall, 11.3 percent of modifications completed during the last three months of 2009 were at least 60 days late after three months, according to a June 23 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
But mortgages modified during the fourth quarter of 2009 have exhibited lower re-default rates, bank regulators note. By comparison, almost a third of homeowners with reworked loans during the fourth quarter of 2008 were falling at least 60 days behind on their payments after three months.
Regulators attribute the lower re-default rates to the significantly lower payments newly-modified loans require, according to their June 23 report. Experts say HAMP played a large role in the change.
Treasury argues that a focus has been to standardize the way that servicers modify mortgages across the industry -- something homeowner advocates acknowledge as a success. They and Treasury point to the fact that servicers are lowering required monthly payments on non-HAMP modifications, and that as a result re-default rates have improved.
Experts, though, argue that re-default rates at six months and 12 months are much more meaningful than the three-month rate.
To Hanson, HAMP "was a way to kick the can and hope for a better day. The problem is, that day is here now."
He forecasts that the next six to 12 months "will really tell the fate of housing. It looks like we're heading for a pretty big disappointment," he says. The next quarter is "definitely going to be ugly" as more foreclosures are processed and more of them hit the market, depressing home prices.
Banks have repossessed about 1.4 million homes since Obama took office, according to RealtyTrac.
Former Federal Reserve Chairman Alan Greenspan said Sunday on NBC News' "Meet the Press" that a so-called double-dip recession was possible "if home prices go down."
Treasury may be running out of options. HAMP is slowing. The number of homeowners entering the program dropped 35 percent to a one-year low in June. Cancellations outpaced new trial and permanent mods in each of the last three months.
"The government sort of did what it had to do to stop the bleeding," Sharga says. "We now have a housing market that's very much like a patient that's in critical condition. I know the government would like to take it off life support, but I'm unsure they know exactly which dials to turn or which hoses to unplug."
Meanwhile, Treasury isn't being forthcoming with the public about its goals, plans, or metrics for success, auditors from three government agencies say.
Treasury officials declined to state how many homeowners will eventually end up with permanent HAMP modifications.
"The American people are essentially being asked to shoulder an additional $50 billion of national debt without being told, more than 16 months after the program's announcement, how many people Treasury hopes to actually help stay in their homes as a result of these expenditures, how many people are intended to be helped through other subprograms, and how the program is performing against those expectations and goals," SIGTARP wrote in its July report to Congress. "Without such clearly defined standards, positive comments regarding the progress or success of HAMP are simply not credible, and the growing public suspicions that the program is an outright failure will continue to spread."
"One of the things that drives me nuts is Treasury's literal refusal to look at the housing market," says Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. Baker argues that the housing bubble has yet to fully deflate. In other words, we haven't hit bottom yet -- a point echoed by analysts like Burns and Hanson.
Nearly 15 million homeowners are underwater, according to a presentation for members of Congress by Mark Zandi, chief economist for Moody's Economy.com, and Robert Shiller, a Yale professor and one of the two creators of the Case-Shiller Home Price Index.
What's Missing From HAMP
"We've got a huge amount of people who are under water that aren't going to be made whole," Baker says. "If you can't persuade the banks to do a write-down that will allow them to stay in their homes, then you haven't done that person a favor."
But HAMP doesn't call for mandatory principal reduction.
"We have consistently said a very small portion (less than five percent) have reported using principal reduction despite the fact that HAMP permits principal reduction at any point," Caldwell says.
As few as 0.1 percent of mortgage modifications initiated under HAMP involve reductions of principal, according to a June report by federal bank regulators. SIGTARP recommends that Treasury "re-evaluate" its approach, arguing that mandatory principal reductions may be the best way to save homeowners from foreclosure. Moody's Investors Service projects that HAMP homeowners will re-default at a potential 70 percent rate without principal reduction. "The ultimate level of re-defaults will depend heavily on the successful implementation of principal forgiveness," Moody's analysts wrote, according to a SIGTARP report.
But while Treasury complains that widespread principal writedowns would exacerbate moral hazard -- the concept that bad behavior without consequence only leads to more bad behavior -- SIGTARP picked apart Treasury's reasoning in its report to Congress, noting that not only could Treasury ensure that undeserving homeowners don't receive principal reductions, but also that "any incremental moral hazard implicated by making principal reductions for homeowners mandatory pales in comparison to the moral hazard caused by TARP assistance to Wall Street."
"Failure to make [principal reduction] mandatory may severely undercut the ability of HAMP" to prevent large-scale re-defaults, SIGTARP noted.
Hanson believes the housing problem was "a lot greater" than the administration's response. "The response should have been a super HAMP," Hanson said, arguing that the administration should have pushed for principal reduction and to amend bankruptcy law to allow for judges to rewrite mortgages on first-lien, owner-occupied homes (bankruptcy judges are powerless to change those terms under current law).
Absent that, Treasury shouldn't have done anything, he said. Rather, the market should have been allowed to run its natural course.
But because Treasury chose something in between, the recovery will be delayed. Hanson forecasts lower home prices nationwide four years out. Treasury is banking on a rebound.
"If you're 50 percent underwater you're not securing equity and you're not secure in your house," Baker says. "We just handed banks money for nothing."
Shahien Nasiripour is the business reporter for the Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.
Arthur Delaney can be reached at email@example.com or on Twitter @ArthurDelaneyHP.