Numbers don’t add up for homeowner relief programs

Commentary: Alphabet soup of federal relief a recipe for bad Kool-Aid

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When the House Financial Services Committee took a cold-light-of-morning look at the performance of the Obama administration’s foreclosure-avoidance programs in a hearing last Thursday, the numbers that emerged weren’t pretty.

Although witnesses from the Treasury Department and U.S. Department of Housing and Urban Development sought to put the best face on the record of HAMP (Home Affordable Modification Program), HARP (Home Affordable Refinance Program), Federal Housing Administration’s Refinance Program, and the Emergency Homeowners Loan Program, virtually no one at the hearing was convinced.

Neil Barofsky, who until March of this year served as the Treasury Department’s special inspector general for TARP (Troubled Asset Relief Program — the stimulus bill funding source for the largest mortgage assistance efforts), said that although it is no longer his role to audit these programs, "(the) numbers are unambiguous; they’re failing."

You may recall the hopeful and heavily hyped starts of the programs back in February 2009, when the White House unveiled the "Making Home Affordable" effort to stem the foreclosure tide.

It included the $75 billion HAMP and HARP programs with targets of keeping millions of troubled owners out of foreclosure.

Since then, a variety of other programs have been rolled out to give bridge loans to borrowers who’ve suffered financial emergencies and need a bridge loan, and a plan to put underwater conventional mortgage borrowers into more favorable FHA loans.

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Based on data provided by the administration and others at the hearing, here’s a thumbnail sketch of the programs and how they stack up today:

1. HAMP. Originally designed to help as many as 4 million troubled owners modify the terms of their mortgages and obtain more affordable monthly payments, the program has resulted in approximately 800,000 permanent modifications and 106,000 trial modifications still ongoing, according to Darius Kingsley, deputy chief of Treasury’s Homeownership Preservation office.

Even if all the trials produce permanent modifications — which is not likely based on past performance — the program will have reached less than a quarter of the original target.

2. Emergency Homeowners Loan Program. The Dodd-Frank financial reform law authorized $1 billion to provide bridge loans of up to $50,000 for owners who had experienced sudden drops in income because of employment or medical problems.

As of Sept. 28, it has resulted in 12,000 completed transactions and is expected to use just $400 million to $500 million of the authorized $1 billion, according to acting FHA commissioner Carol Galante. The 12,000 funded cases were all that HUD could manage to approve out of 100,000 applications.

3. FHA Refinance Program, aka "Short Refi." This was designed to help as many as 1.5 million underwater owners refinance into affordable FHA loans, and was funded by $8 billion originally set aside for HAMP. As of the end of September, FHA and the program’s 27 participating lenders had completed just 334 refinancings, according to the agency.

4. HARP. The administration’s signature program for homeowners who have lost equity because of declining home prices but who nonetheless have stayed current on their payments. Only borrowers with loan-to-value ratios above 80 percent and no higher than 125 percent are eligible. Originally projected to help between 4 million and 5 million owners, as of August it had resulted in 838,000 refinancings.

When you stand back and look at these numbers, you’ve got to ask: What happened?

In the midst of the worst foreclosure crisis since the Great Depression, with one-fifth of all homes underwater and record numbers of mortgages in serious delinquency, why didn’t the administration’s programs yield more?

Were there inherent design flaws, poor performances by federal agencies, and a general unwillingness by private lenders and servicers to participate? Or all of the above?

Several witnesses at the hearing sought to provide answers. Laurie Goodman, senior managing director of Amherst Securities Group LLC, an expert on mortgage-backed securities, said the key problem with HAMP was "program design." Among the issues:

1. Borrowers’ debt burdens were "ignored." HAMP’s modified loan payment targets — set at 31 percent of household income — were based solely on "front-end" mortgage debt ratios rather than "back end" ratios that included second liens, credit card balances, and auto and student loan payments.

Many owners failed their trial modifications because they were loaded down with smothering debts beyond their first mortgages. Median back-end ratios went from an impossible-to-sustain 78.4 percent before modification to a "still unsustainable 61.6 percent" after modifications, according to Goodman.

"A long-term sustainable debt restructuring requires that other debts be restructured as well," she said — not just the first mortgage.

2. HAMP never provided long-term incentives for borrowers via a path to eventually regaining positive equity. Goodman was one of the relatively few early critics of the program in 2009 who predicted it wouldn’t achieve its lofty projected goals without principal reductions and write-downs of second liens and other debts.

3. The program also asked loan servicers to do tasks they were poorly equipped to handle, such as underwriting. This created delays as banks had to train staff and set up administrative systems.

Barofsky, who observed HAMP and HARP up close, said part of the problem was that their unrealistically high promises were "politically motivated" for congressional and public consumption, and that the Treasury Department "had to have known" that large banks and their servicing affiliates were "totally unequipped" to handle the sort of modification volumes envisioned.

Barofsky also said that Treasury should have insisted on principal reductions as an option from the start, using its TARP bailout dollars to banks "as leverage over the parent companies of the mortgage servicers. Instead, it incompetently administered an ineffective program that seems to have better served the banks than homeowners."

At the hearing, administration officials acknowledged some deficiencies but also claimed credit for the far larger numbers of mortgage modifications that have been completed by lenders outside the HAMP-HARP framework since 2009.

The Treasury Department’s Kingsley said HAMP essentially provided guidance to the banks on how to do modifications on their own. HUD’s latest monthly "housing scorecard," released Oct. 5, even claimed the 2.4 million modifications completed under the lending industry’s private Hope for Homeowners program were the "direct result of the standards and processes the administration’s programs have established."

A personal acknowledgment to close: Back in 2009, I uncritically accepted — and reported — the lofty goals and hype about HAMP, HARP, et al.

Like others concerned by the horrendous financial events of late 2008 and early 2009, I hoped these programs would live up to the promises and help millions. Thirty-two months later, I am off the Kool-Aid.

Ken Harney writes an award-winning, nationally syndicated column, "The Nation’s Housing," and is the author of two books on real estate and mortgage finance.

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