Following a week when the Treasury Department, the Department of Housing and Urban Development, and the Federal Home Financing Agency have each released reports touting the success of their foreclosure prevention programs, the group charged with their oversight now says the picture isn't quite so rosy.
The Congressional Oversight Panel which was created by Congress to keep an eye on expenditures under the Troubled Asset Relief Program (TARP) and to provide recommendations on regulatory reform issued its October report this morning. It expresses "concern about the limited scope and scale of the Making Home Affordable Program (HAMP)."
The panel is specifically charged with assessing the effectiveness of HAMP and a sister program, The Home Affordable Refinance Program (HARP.) HAMP is designed to assist homeowners who are seriously delinquent on their mortgages through loan modifications while HARP is directed toward homeowners who are current on their mortgages but owe more on those loans than their homes are worth.
Since the panel last reported in March, HARP has closed 95,729 refinances which the panel says has hopefully reduced the number of homeowners who may face foreclosure in the future. By the end of September HAMP had facilitated 1,711 permanent mortgage modifications (following successful completion of a three month trial period) and placed 362,348 other loans into trial modifications. As reported here yesterday, those trial modifications have now reached 500,000.
The panel said that the $42.5 billion which Treasury estimates it will spend on HAMP should support about 2 to 2.6 million modifications. If these are successful in reducing investor losses, they should translate into improved recovery on other taxpayer investments. However, the report states, "if foreclosure starts continue their push toward 10 to 12 million, as currently estimated, the remaining losses will be massive."
In its 210 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 operation and structure of HAMP; its scope, its scale, and its permanence.
Scope. There is reason to doubt that Treasury will be able to achieve its foreclosure prevention goals because HAMP is limited to certain mortgage configurations. The expected wave of delinquencies in payment option adjustable rate mortgages and interest only loans will be outside of HAMP eligibility guidelines. In addition the program was not designed to address foreclosures arising from unemployment which now appears to be a major reason for non-payment. Furthermore, foreclosures are now moving from the subprime into the prime mortgage market. "It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," the report states.
Scale. The report acknowledges that significant infrastructure is required to carry out the goals of HAMP, both at the Treasury Department and at the participating servicers and that such infrastructure cannot be constructed overnight. Currently, however, foreclosure starts are outpacing new trial modifications by a 2 to 1 ratio and some homeowners who could have benefited lost their houses before they could avail themselves of any help. The report cites the near-term target of 500,000 trial modifications by November 1 as possible (as stated, it has been attained) "but may not be large enough to slow down the foreclosure crisis and its attendant impact on the economy." Treasury has estimated that the program, once it is fully operational, could reach 25,000 to 30,000 modifications per week but, the panel claims that at that rate less than half of the predicted foreclosures could be avoided.
Permanence. The panel expressed skepticism about the ability of the modifications to put borrowers into stable situations on a long-term basis. In the first few months of the program, the report says only a very small proportion of the loans that have been entered into trial modification periods have been converted into permanent modifications and even if that percent is greatly increased, many modification plans allow payments to rise after five years. Also, HAMP modifications increase negative equity for many and this appears to be associated with increased rates of redefault. Thus HAMP may merely be delaying foreclosures, not avoiding them.
Even if Treasury successfully addresses the panel's concerns, the future success of the program will also depend on the housing market. One-third of all mortgages are underwater at present; that is the homeowner owes more on the mortgage than the house is worth, and there are suggestions that this will increase to one-half if home prices continue to drop. Negative equity makes it more likely that homeowners will simply mail their keys to the bank if they have to move or if they encounter financial problems. Other may simply conclude they are better off giving up their homes and renting for a while rather than continuing to pour money into a mortgage. Negative equity could mean that the country will continue to see high foreclosure rates and housing instability for many years.
The panel makes several recommendations. Treasury should reconsider the scope, scalability, and permanence of its programs so as to minimize the economic impact of foreclosures and should also consider whether new programs or program enhancements should be adopted.
Treasury must be fully transparent about its programs' operations and effectiveness. While the department's data collection is improving it should be expanded and the results made public. It should also release its Net Present Value model which is used to determine homeowner eligibility and borrowers should be given specific reasons when their modifications are not approved and presented with a clear path of appeal.
The process and its associated documents should be made more uniform so that all parties involved - borrowers, servicers, and advocates - can easily navigate the system and the panel restated a request from its March report for development of a web portal.
The panel also urged strong consequences for servicers who fail to comply with the program's requirements and for development of performance metrics to reinforce accountability along with a public report of compliance that names the lenders and/or servicers.
The congressional panel is composed of the following members: former Securities and Exchange Commissioner Paul S. Atkins, Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York, and Damon Silvers, Associate General Counsel of the AFL-CIO. The fifth member, Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School, has been the public face of the panel, appearing frequently on a variety of cable and network news shows.
