Experts: Obama’s Mortgage-Fix Program is Doomed to Fail
They testified before the House Financial Services Committee, one mortgage industry expert after another, and they all had a similar theme: the Obama Administration’s mortgage modification program is flawed and doesn’t address the rampant, crippling issue of negative equity.
The primary subject was the government’s Home Affordable Modification Program (HAMP), which provides capped incentives to mortgage servicers, lender/investors and borrowers that participate in modification of mortgages to reduce monthly payments. The objective is to help homeowners avoid foreclosure.
Negative equity, when a home is valued less than the total of all mortgage balances against the property, is the largest hurdle for HAMP, particularly in the hardest foreclosure hit states of Arizona, California, Florida and Nevada, experts said.
In these states, the negative equity problem “is going to be very, very challenging for the servicing industry; loan modifications must take into consideration the negative equity position of households to determine their likelihood of success for making mortgage payments,” said Anthony Sanders, professor of real estate finance at George Mason University.
Julia Gordon, senior policy counsel at the Center for Responsible Lending, said HAMP will fail to reach it’s potential unless lenders reduce the mortgage principal of the targeted homeowners.
“There are two main reasons why addressing the question of equity position is so important: the incentives to homeowners to continue to perform on their loans, and the ability of the HAMP program to help people in payment option ARM and interest-only loans,” Gordon said. “Many analysts believe that principal reduction is ultimately the only way to help the housing market reach equilibrium and begin to recover.”
Ultimately, Gordon said, it is likely that the only way principal reduction “is ever going to happen is if it is required as part of HAMP or a program like HAMP,” and if there are financial incentives for lenders for taking the writedown.
“We have a great frustration at the failure of the combined efforts of the federal government to make a substantial impact on the foreclosure issue,” said House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat. “No one thinks we have done a satisfactory job.”
Banking giant Chase today announced that it had permanently modified 83,000 mortgages, but also criticized the HAMP program in a press release.
“We first attempt to help struggling borrowers using the Home Affordable Mortgage Program,” said Charlie Scharf, head of Retail Financial Services at Chase, part of JPMorgan Chase & Co. “If they are not eligible for it, we use a range of other modification programs.”
Scharf added that it has been a “struggle” under HAMP rules to convert modifications to permanent status.
Under the HAMP rules, he said borrowers must make at least three trial payments, provide documents, including proof of income and hardship verification, and have their credit re-underwritten to get a permanent modification.
Banks are rushing to meet a new deadline from the Treasury, announced on Nov. 30, to permanently convert more than half of the 650,994 loans that were in trial modifications at the end of October into permanent reductions by year’s end.
