Who's Really to Blame for the Failure of HAMP?

The AOL Huffingtonpost headline today shouts that the Obama administration is "punishing" three mortgage servicers for failure to comply properly with the terms of the much maligned Making Home Affordable Program. The punishment involves withholding payments from the Treasury to the combined three largest servicers of mortgage debt in the US--Bank of America, Wells Fargo, and JP Morgan Chase.  This newest announcement is just the latest in a series of blows rained down on the banks lately by the federal government.  After losing the vote to delay implementation of the Durbin Amendment Wednesday, the banks are going to be looking for new ways to make up the loss of $16 billion dollars which they currently receive through swipe fees.  With the government's announcement yesterday, it would appear that the Administration is in a full-fledged war against the banking system.

In reality, the threats are really just token threats to get front-page attention.  The Treasury Department has been threatening to withhold funds from the banks for nineteen months, and the suspension of payments is only temporary--as soon as the banks come in line with the Treasury Department's standards, the payments will resume.

There can be no question that the Making Home Affordable Program (commonly known as HAMP) has been a disaster.  When the Administration announced the program in 2009 to modify the mortgage terms of homeowners who were experiencing difficulties, the White House assured us that 3 - 4 million homeowners would receive help under HAMP.  As of last October, which appears to be the latest data available--only about 483,000 homeowners were able to reduce their monthly mortgage payment using HAMP--about 16% of the total homeowners the program was promised to help.  Estimates today say that twice as many Americans have been kicked out of the program as accepted, and an alarming number have remained in the "trial modification" phase for 12 to 18 months while waiting for a final decision from their mortgage servicer about whether they qualify for a permanent modification. 

Being stuck in trial modification can be a nightmare for homeowners.  If they have mortgage delinquencies, their mortgage payments continue to report delinquent during the trial mod, which drags down their credit and can prevent them from being able to get a car or any other type of credit and can even impact their ability to get jobs if the employer runs a credit check.  Further, even though the mortgage payment is reduced during the trial modification, the difference between the full payment and the reduced trial payment accrues on top the principal of the note, so that a homeowner who ultimately does not qualify for modification ends up in a dramatically worse position than he or she started in, since the amount owed to the mortgage company is now higher than it was at the beginning.  And for borrowers who are stuck in the trial modification program for 12 to 18 months, often that increase in total debt brought on by the reduced trial modification is the very reason that the homeowner does not qualify for permanent modification at the end of the trial period.   So after complying with all of the HAMP guidelines, a borrower can be denied at the end of the process simply because the process took too long in the first place.

The initial theory behind HAMP was that reworking mortgages would allow distressed homeowners to remain in their homes and the mortgage servicers would take smaller losses than they would in a foreclosure situation.  But new studies indicate that even those homeowners who are accepted for permanent modifications have about an 80% debt to income ratio by the time they receive their modification, so the chances that these homeowners will actually get to remain in their homes even after the modification are very slim.  According to the Huffington Post, 3 out of 4 housing counselors reported that borrowers had a "negative" or "very negative" experience with HAMP.  Only 9% of borrowers described their experience as either "positive" or very "positive."

HAMP was an ill-conceived, poorly-executed program which did not at all deliver on its promise to keep 3-4 million homes out of foreclosure.  In fact, the U.S. is on track for 6.5 million foreclosures by 2012.  The program has not stabilized housing or home values.  But is the failure of the program the fault of the mortgage servicers?

Probably only in the sense that poorly-trained, over-worked bank employees did not respond in a timely manner to let borrowers know that they did not qualify for the program.  If they had done so, some of those borrowers might have been foreclosed on one year to eighteen months ago.  For some, HAMP and the "trial modification" process just delayed the inevitable.

For others, the HAMP program probably made their situation much worse than it needed to be.  Unquestionably, some borrowers who were strapped but able to make their payments probably ended up in this program and then found that the very vehicle that was supposed to bring them some relief actually dragged them into foreclosure.

But the basic fault of the failure of the HAMP program is the program itself and the Treasury Department. With so many new rules and so much new oversight over the banks, most borrowers simply did not qualify for any type of relief.  The Treasury Department and the White House used HAMP as a carrot to dangle in front of stressed homeowners to promise relief that was simply not available to most of them.  Now they are blaming the mortgage industry for the failure of that program.  JP Morgan Chase disagrees the Treasury Department's claims that they have not acted properly in the program, and a representative from Wells Fargo told the Huffington Post that they are formally disputing the government's findings because the report, "contradicts previous written assessments shared with us by the Treasury."

In mortgage lending, we are required to make certain that the rates and programs that we offer are rates and programs that are actually available and that we have a reasonable expectation that our borrower could qualify for.  Only the federal government could promise relief to between 3 and 4 million homeowners when actually only about 25% of those will really qualify for permanent modifications and then blame private industry for their own failed program.

I am also troubled by the fact that "punishing" industry is now a headline grabber.  The Treasury Department's announcement is really designed to make front page news--to make Americans feel that their government is working on their behalf by whipping the evil banks.  The whole idea of punishment for not be able to deliver on a program that was unworkable is as ridiculous as it is wrong.

As a society, we need to guard against the temptation to find a scapegoat for every situation.  It is a dangerous tendency to want to punish an industry (any industry) when we are unhappy with the outcome of a program.  And it is dangerous to set up industries or groups of people as public enemies who deserve our collective blame and scorn whenever we have problems rather than taking responsibility for our own bad decisions.

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Magic Water and Big Government

During the wee hours of this morning, my brother saw an infomercial for magic water that will erase all of a person's debt. (I am not making this up; we googled it today to make sure that he was not putting us on!). A person who wants a fresh start in life merely sends to some money to the organization hawking the water, and when the vial of elixir arrives, he or she pours it over the mailbox. Within days, all debt has been forgiven.

The infomercial apparently featured happy users of the magic water who had been deeply in debt before receiving their supply. They are now debt free and prosperous. The magic water apparently not only forgives existing debt but is income producing as well. One of them is now closing on her third home. (I wonder whether she will use the magic water to expunge the mortgage or whether this is a once in a lifetime debt forgiveness.)

As reasonably intelligent, worldwise people, we would tend to scoff at the very concept of magic water, but that is mainly because we don't believe it would work. But I wonder what would happen if we knew for sure that, instead of just a pile of soggy mail, we really would have complete debt forgiveness. If the water did work, if we could see its effects and know that it could meet every claim, would we still scoff? I submit that the purveyors of magic water would have an immediate shortage as it became the most in-demand product in the U.S--perhaps even worldwide as its fame spread. And unless one of its magic properties is to reimburse the creditor, it would be responsible for the greatest financial crash in history. How many of us would stop to say to ourselves, "I wonder how much money it will cost the companies I borrowed from it I don't pay them back." Would we even think about those losses at all?

This sounds ridiculous, because it is, but if you think about it, that is exactly what we as a nation are attempting to do right now with so much of our personal debt. When we demand that lenders reduce the principal balances of mortgages, we are not considering that the bank loaned that money on a specific piece of property, and that when we refuse to pay it back we are costing them money. How many borrowers exercising "strategic default" think about the fact that they are walking away from a house that the bank will have to sell at less than the amount owed. In most cases, that is no more the bank's fault than it is ours as the buyer of the home, yet we don't feel guilty about it. We just want a quick fix, even if it comes at somebody else's expense.

The only real long term solution to debt and financial problems is to work to solve the problem. For some that means bankruptcy with a payment plan, for others it means learning to live within our means. Real financial reform starts at a personal level with personal integrity and the knowledge that our actions and decisions affect others--sometimes many others. The core principal of a credit society is that we honor our obligations and we all do our part, without looking for magic water or a magic fix from Uncle Sam.