You would be pretty hard-pressed to find a market observer out there who is impressed with the strides the Home Affordable Modification Program (HAMP) has made since it was introduced in February 2009. I’ve often been extremely critical of its success, or lack thereof, and the money we’re spending, or wasting, on its behalf. For one, I get especially irritated when Washington forgets about HAMP’s original goals and functions and tries to turn nothing into something.
As much as I have lambasted HAMP in the HSH blog, I can honestly say that, until recently, I’ve never thought too much about clipping the initiative before its slated expiration date. However, recent comments from several lawmakers have got me thinking: maybe it is time for HAMP to go.
In January, Rep. Randy Neugebauer (R-Texas), a top Republican on the House Financial Services Committee, said he thinks the government should end their efforts to prevent foreclosures:
“All these foreclosure mitigation initiatives we’re taking need to stop,” he said, speaking at an event co-hosted by the University of Maryland’s Robert H. Smith School of Business and the NYU Stern School of Business.
Both Rep. Darrell Issa (R-Calif.) and Rep. Jim Jordan (R-Ohio) also agree that it’s time for HAMP to go. In fact, Issa and other Republican lawmakers recently introduced legislation that would end the program:
From Mortgage Servicing News (Amilda Dymi, 01/28/11):
"HAMP is a colossal failure," Rep. Jim Jordan, R-Ohio, a member of the committee who sponsored the bill, said in a press release issued by the committee. "In many cases, it has hurt the very people it promised to help. It's one more example of why government interference in the private sector doesn't work and that's why it should be repealed."
If you can get over the fact that HAMP is helping some American homeowners avoid foreclosure, albeit not even close to the number they set out to assist, the opinions of the above-mentioned lawmakers aren’t as far off as you may think. You could fill countless blogs across the web with stories from frustrated homeowners who had their HAMP applications denied for one reason or another, many even rejected after making on-time trial payments for a year or even longer.
Latest figures, future projections
According to the latest figures released by the Treasury, 521,630 permanent HAMP modifications have taken hold through December 2010. To put that number into perspective, 3.8 million foreclosure filings took place in 2010, according to RealtyTrac. HOPE NOW says 1.65 million permanent loan mods took hold between January and November of last year. In November alone, approximately 82,000 were private-market mods while almost 30,000 were offered under HAMP.
Two years into HAMP and with nearly two years to go, you have to wonder just how many more struggling homeowners will be blessed with permanent mods. Sure you could say that HAMP has helped to delay or avert a tidal wave of foreclosures, or that HAMP has served to foster an increase in successful private-market modifications, yet, that would be, as I mentioned earlier, turning nothing into something. HAMP was not created to delay foreclosures or help evolve other foreclosure-prevention efforts. It was designed to save 3 million to -4 million homeowners from foreclosure.
As we consider the potential number of permanent mods that will occur between now and Dec. 31, 2012, when HAMP is scheduled to expire, you could argue that the bulk of qualified borrowers have already been through the ringer that is known as the HAMP application process. By that logic, if after two years all we have seen is about 522,000 permanent modifications, we likely won’t see that same sum escalate by that much over the next two years. So, by Dec. 31, 2012, how many permanent mods will HAMP have achieved? 750,000? 850,000? Even so, still nowhere close to 3 million to -4 million.
Let’s also not forget about cost – these loans aren’t being modified for free. A bevy of “incentives” – to borrowers, servicers and investors -- are paid out on each modified loan as a way to encourage long-term success and reward preemptive modifications.
According to the Making Home Affordable Handbook (beginning on pg. 92), servicers receive up to $1,500 for each completed modification under HAMP. Servicers also obtain up to $3,000 ($1,000 a year for up to three years) – the “Pay for Success” incentive -- if the modified loan payment was reduced by at least 6 percent.
Borrowers who have their payments reduced by at least 6 percent receive a “Pay for Performance” incentive of up to $1,000 annually ($83.33 per month) that goes towards paying down their principal for every year they stay current (for up to five years). There’s also a payment-reduction-cost share where the investor gets half of the dollar difference between the borrower’s monthly payment at 38 percent vs. 31 percent.
In conclusion, do I think HAMP will be shut off overnight? No. Should it be? That’s hard to say. When lawmakers ultimately decide HAMP’s future they need to ask themselves this question: When all is said and done, how much are we spending to modify how many loans, and is it worth it?
Perhaps the time, money and effort being poured into HAMP would be better spent addressing the “underwater-but-can’t- refinance” population. But that’s a different subject for another article.