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Where Did HAMP Go Wrong?

By Adam Levitin

Jean Braucher's posts about servicers as gatekeepers raises the question of just where did HAMP go wrong?  

HAMP has always been fatally flawed conceptually and operationally it has also been fraught with problems.  Conceptually, HAMP was always an attempt to get away with doing as little as possible, hoping that the market would turn around, hoping that all the housing bears were wrong. HAMP has never been real serious about negative equity, unemployment, or second liens.  Yes, there are add-on programs for all of those, but they are too little, too late.  

The operational problems sapped a lot of energy from Treasury and also served as a distraction from the much more important conceptual flaws.  The program's limited effect could be blamed on operational, rather than conceptual issues, when even if operations had been perfect, the program would still have been a flop.  (OK, it's not Hope 4 Homeowners, which I called, although not as bad as just 72 endorsements though July 2010 (and I can't tell if I'm double counting 12 of them!) but it's still a pretty sorry mess.)  

It's kind of a relief not to have to argue any more about whether HAMP is a failure.  I think that issue has been pretty clearly resolved, even if Treasury will never concede it.  But when HAMP is all over and done, it'll be interesting to do a real post-mortem (GAO goes forensic? Note that HAMP will continue long after the Congressional Oversight Panel disbands--will there be oversight?  Will Treasury continue to publish performance reports?). In hindsight, there were a bunch of really bad initial decisions in HAMP (in no particular order) that probably sealed the program's fate:

(1) placing the program in Treasury, which had no experience with housing, with consumers, with mortgage servicers, or with running this sort of program.  HUD or even NAC would have been much more sensible choices.  

(2) letting the servicers be the borrower interface.  Treasury should have had a central interface that it ran and should have intermediated between borrowers and servicers.  That would have greatly increased the program's administrative burden, but it would have given Treasury much greater control and information about executive and quality control.  Indeed, Treasury could have put the mod work out for competitive bidding.  It's basically underwriting work, so there's no reason to think that servicers would have much competence in it.  (Of course, the underwriting that we've seen in recent years, doesn't engender confidence...)   But outsourcing to the servicers, over whom Treasury has no effective disciplinary tool (kicking them out of the program would be self-defeating and might give some servicers exactly what they want) was going to be disaster from day 1.  If Treasury had known a little more about the industry, this should have been readily apparent.  Servicing is a transaction processing business first and foremost, not a loan mod business.    

(3) involving the GSEs as Treasury's agents.  The GSEs have their own tsoris to deal with and have never been enthusiastic about HAMP.  Their involvement was never going to be a plus.  

(4) way-too-high DTI targets.  31% front-end DTI is higher than the GSEs' own affordability guidelines.  And ultimately back-end DTI is probably more important than front-end.  

(5) indecision about whether HAMP was going to be streamlined, cookie cutter mods or individualized mods.  Treasury split the difference, which meant doing both poorly.  We have mods that are too cookie cutter without the benefits that come from streamlining. 

(6) lack of an aggressive government-run PR campaign.  I get that it would have involved a lot of pain in the ass government contracting issues, but if there's a will, there's a way.  

(7) inability to decide whether the program was about stabilizing the housing market or about helping honest but unfortunate debtors.  To accomplish the former, the trick is to constrain supply by preventing foreclosures.  It doesn't matter which foreclosures are prevented; it's the sheer volume that matters.  But politically that was a hard sell--why does the shmuck neighbor who bought a McMansion he couldn't afford get helped out?   There's an argument to be made, but it wasn't one the administration was willing to make.  The result is that HAMP eligibility is so restricted that only 1 in 6 troubled mortgages is even eligible.  

(8) Lack of seriousness about negative equity, unemployment, and second liens (see above).  I'll have more to blog about the seconds issue, but rather than cracking the whip on these issues, Treasury focused on affordability (under weird metrics) and ended up with a program that produced what look like refurbished subprime loans:  high LTV, low FICO, balloon payments, high DTI, and interest rates that step up over time.  HAMP was oversold and underperformed.  

Watch how the goal posts are being moved now.  It's not that HAMP will help 3-4 million homeowners.  It's that HAMP will reach out to 3-4 million homeowners.  Should we get excited that 3-4 million homeowners are going to get a phone call?  Similarly, we hear that lots of consumers who drop out of HAMP are getting proprietary mods from their servicers.  Great.  But let's keep in mind the metric that really matters are permanently averted foreclosures.  Delayed foreclosures don't count.  

On this theme, we haven't seen the real tragedy of HAMP yet:  the redefaults.   The estimate is that about two-thirds of "permanent" mods will redefault over the next five years.  Was this program really worth it?  Couldn't the TARP funds have been better deployed elsewhere?  

What the redefaults point to is that HAMP isn't a solution.  It's a delay tactic, to kick the foreclosure can down the road as long as possible.  But that huge shadow inventory isn't going to sit on the sidelines forever, and as it starts coming onto the market, we're going to see further price drops and another wave of defaults.  (Not to mention that a lot of what's left of payment option ARMs will be exploding in 2011).  

The failure of HAMP and other foreclosure prevention efforts will be seen as a real failing of political will by the Obama administration.  But what worries me, and I will probably blog on this separately, is that the inability to deal with the housing finance "legacy" problem, as the foreclosures and GSE conservatorship are known, may well cripple efforts to deal with the housing finance future.  As much as we might want to separate the legacy and future of housing finance, I don't know that we can as a political matter.  

Full post as published by Credit Slips on September 22, 2010 (boomark / email).