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HAMP fizzles

By Alan White

Treasury reported Friday that a hopelessly inadequate 37,000 mortgages were permanently modified as a result of the Administration?s HAMP program in July.   The program, funded by TARP bailout money, offers mortgage servicers incentives and subsidies to modify mortgages, something they were doing before and should be doing far more anyway.  Last month's total translates to fewer than half a million modifications annually, compared with perhaps 3 million new foreclosure starts and 1 to 2 million completed foreclosure sales we can expect in this Year Four of the foreclosure crisis.  The future prospects of the program are dim:  fewer than 25,000 new trial modifications were generated last month, compared to the more than 100,000 monthly at the program's peak in the fall of 2009.

The July report also brings the news that more than 600,000 homeowners had trial modifications but those have now been canceled.  While some were thrown out because of missed payments, the leading cause was apparently missing paperwork (the report omits any statistics on causes of cancellations).  HAMP has been a massive exercise in false hopes for 45% of its participants.  The report notes that most of the homeowners with canceled modifications remain in limbo, either in an "action pending" category or being considered for non-HAMP modifications.  

Investor reports that I tabulate show that monthly modifications of securitized mortgages are still lower in July 2010 than they were in March 2009, before HAMP offered mortgage servicers generous incentive payments to increase their foreclosure prevention activities.  There is no shortage of new homeowners entering default and foreclosure, as tomorrow's second quarter National Delinquency Survey will undoubtedly reveal, and thus plenty of potential mortgages to work out.  It is particularly absurd that half of the permanent modifications subsidized by HAMP are Fannie and Freddie mortgages.  Fannie and Freddie have been effectively nationalized, and there is no reason that the government cannot simply instruct mortgage servicers to do the modifications without throwing TARP money at them.

The foreclosure crisis continues unabated, and the mortgage industry is doing essentially what it was doing before Treasury offered it $50 billion to do its job.  The timid HAMP incentive approach has proven ineffective, even counterproductive.  The good news, I suppose, is that taxpayers will never spend that $50 billion because servicers will never meet their budgeted modification numbers.  The bad news is that the risk of the US economy experiencing a Japan-style lost decade looms larger.  Existing home sales, we learned last week, collapsed after the government's tax credit subsidy expired, and we now have a 12-month inventory of unsold homes.  One third of the cratered home sales consists of foreclosure and short sales.  Home prices have not reached bottom.  Banks continue to extend and pretend, but not lend, not surprisingly, given the huge mortgage losses that remain unrealized. 

The Frank-Dodd financial reform bill tinkers with HAMP, but also offers new foreclosure aid, in the form of bridge loans to unemployed homeowners.  The danger with continuing these approaches is that defaults and foreclosures will remain at historic levels for years while palliative measures become the norm.  Candidate Obama promised bold measures to end the foreclosure crisis, incuding a foreclosure moratorium, and empowering bankruptcy courts to write down homeowners' mortgage principal.  Urgency now seems to have given way to complacency. 

Full post as published by Credit Slips on August 25, 2010 (boomark / email).