Oversight Panel Questions HAMP’S Effectiveness

Following a weekrnwhen the Treasury Department, the Department of Housing and Urban Development,rnand the Federal Home Financing Agency have each released reports touting thernsuccess of their foreclosure prevention programs, the group charged with theirrnoversight now says the picture isn't quite so rosy.

ThernCongressional Oversight Panel which was createdrnby Congress to keep an eye on expenditures under the Troubled Asset ReliefrnProgram (TARP) and to provide recommendations on regulatory reform issued itsrnOctober report this morning.  Itrnexpresses “concern about the limited scope and scale of the Making HomernAffordable Program (HAMP).”

Thernpanel is specifically charged with assessing the effectiveness of HAMP and arnsister program, The Home Affordable Refinance Program (HARP.)   HAMP isrndesigned to assist homeowners who are seriously delinquent on their mortgagesrnthrough loan modifications while HARP is directed toward homeowners who arerncurrent on their mortgages but owe more on those loans than their homes arernworth. 

Sincernthe panel last reported in March, HARP has closed 95,729 refinances which thernpanel says has hopefully reduced the number of homeowners who may facernforeclosure in the future.  By the end ofrnSeptember HAMP had facilitated 1,711 permanent mortgage modificationsrn(following successful completion of a three month trial period) and placedrn362,348 other loans into trial modifications.  rnAs reported here yesterday, those trial modifications have now reached 500,000.rn 

Thernpanel said that the $42.5 billion which Treasury estimates it will spend onrnHAMP should support about 2 to 2.6 million modifications.  If these are successful in reducing investorrnlosses, they should translate into improved recovery on other taxpayerrninvestments.  However, the report states,rn”if foreclosure starts continue their push toward 10 to 12 million, asrncurrently estimated, the remaining losses will be massive.”

In itsrn210 page report the panel, relying in part on a cost benefit analysis conducted by Professor Alan White of Valparaiso University, expressed three concerns about the current operationrnand structure of HAMP; its scope, its scale, and its permanence.

Scope.  There isrnreason to doubt that Treasury will be able to achieve its foreclosurernprevention goals because HAMP is limited to certain mortgage configurations.  The expected wave of delinquencies in paymentrnoption adjustable rate mortgages and interest only loans will be outside ofrnHAMP eligibility guidelines.  In additionrnthe program was not designed to address foreclosures arising from unemploymentrnwhich now appears to be a major reason for non-payment.  Furthermore, foreclosures are now moving fromrnthe subprime into the prime mortgage market. rn”It increasingly appears that HAMP is targeted at the housing crisis asrnit existed six months ago, rather than as it exists right now,” the reportrnstates.

Scale.  The reportrnacknowledges that significant infrastructure is required to carry out the goalsrnof HAMP, both at the Treasury Department and at the participating servicers andrnthat such infrastructure cannot be constructed overnight.  Currently, however, foreclosure starts arernoutpacing new trial modifications by a 2 to 1 ratio and some homeowners whorncould have benefited lost their houses before they could avail themselves of anyrnhelp.  The report cites the near-termrntarget of 500,000 trial modifications by November 1 as possible (as stated, itrnhas been attained) “but may not be large enough to slow down the foreclosurerncrisis and its attendant impact on the economy.”  Treasury has estimated that the program, oncernit is fully operational, could reach 25,000 to 30,000 modifications per weekrnbut, the panel claims that at that rate less than half of the predicted foreclosuresrncould be avoided.  

Permanence.  The panel expressedrnskepticism about the ability of the modifications to put borrowers into stablernsituations on a long-term basis.  In thernfirst few months of the program, the report says only a very small proportionrnof the loans that have been entered into trial modification periods have beenrnconverted into permanent modifications and even if that percent is greatlyrnincreased, many modification plans allow payments to rise after fivernyears.  Also, HAMP modifications increasernnegative equity for many and this appears to be associated with increased ratesrnof redefault.  Thus HAMP may merely berndelaying foreclosures, not avoiding them.

Evenrnif Treasury successfully addresses the panel's concerns, the future success ofrnthe program will also depend on the housing market.  One-third of all mortgages are underwater atrnpresent; that is the homeowner owes more on the mortgage than the house isrnworth, and there are suggestions that this will increase to one-half if homernprices continue to drop.  Negative equityrnmakes it more likely that homeowners will simply mail their keys to the bank ifrnthey have to move or if they encounter financial problems.  Other may simply conclude they are better offrngiving up their homes and renting for a while rather than continuing to pourrnmoney into a mortgage.  Negative equityrncould mean that the country will continue to see high foreclosure rates andrnhousing instability for many years.

Thernpanel makes several recommendations.  Treasuryrnshould reconsider the scope, scalability, and permanence of its programs so asrnto minimize the economic impact of foreclosures and should also considerrnwhether new programs or program enhancements should be adopted. 

Treasuryrnmust be fully transparent about its programs' operations and effectiveness.  While the department's data collection isrnimproving it should be expanded and the results made public.  It should also release its Net Present Valuernmodel which is used to determine homeowner eligibility and borrowers should berngiven specific reasons when their modifications are not approved and presentedrnwith a clear path of appeal.

Thernprocess and its associated documents should be made more uniform so that allrnparties involved – borrowers, servicers, and advocates – can easily navigaternthe system and the panel restated a request from its March report forrndevelopment of a web portal.

Thernpanel also urged strong consequences for servicers who fail to comply with thernprogram's requirements and for development of performance metrics to reinforcernaccountability along with a public report of compliance that names the lendersrnand/or servicers.

Therncongressional panel is composed of the following members:  former Securities and Exchange CommissionerrnPaul S. Atkins, Congressman Jeb Hensarling (R-TX), Richard H. Neiman,rnSuperintendent of Banks for the State of New York, and Damon Silvers, AssociaternGeneral Counsel of the AFL-CIO.  Thernfifth member, Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard LawrnSchool, has been the public face of the panel, appearing frequently on arnvariety of cable and network news shows.

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