President Obama’s beloved foreclosure-prevention scheme, the Home Affordable Modification Program (HAMP), was a fraud from Day One: It is designed to do nothing but camouflage the effects of the housing meltdown. It is based on bribery — paying the banks to modify (or pretend to consider modifying) mortgages that they really had no business or interest in modifying. And administration of the program was entrusted to Financial Public Enemy No. 1: Fannie Mae, the government-sponsored enterprise that did so much to inflate the housing bubble in the first place while enriching its politically connected executives and committing a sustained campaign of outright financial fraud. An economically meretricious bank-bribery scheme run by a known criminal organization: That’s the foundation of the Obama administration’s housing strategy.
This was guaranteed to go bad in a hurry, and it did. Republicans now want to kill the program, and they should, the protestations of our tax-dodging treasury secretary and the Obama administration’s feckless economic team notwithstanding.
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HAMP often is criticized for the fact that the great majority of the people who receive temporary (“trial”) modifications under the program ultimately are rejected, receiving no permanent modification of their mortgages. The critics suggest that this is a shortcoming of the program, the effect of bureaucratic ineptitude and governmental inertia. That is poppycock: The fact that most of the temporary modifications will never become permanent modifications is a built-in feature of the program, the economic incentives of which all but guarantee that outcome. The program is, to be blunt, a scam.
Here’s how it works: Fannie Mae gets paid a certain amount of money to administer the program, and its payments are structured in such a way that it has an incentive to push more people through the application process. A former Fannie Mae insider charges in a whistle-blower lawsuit that Fannie’s main concern in administering HAMP was maximizing its own fees. (Surprise.) The banks and “mortgage servicers” get paid to put people into modification trials, and their incentives are structured in such a way that if it makes sense to go ahead and foreclose anyway after the trial, then they make money doing that, too. But not until they’ve extended the trial to whatever point maximizes their financial return.
The worst feature of HAMP isn’t that it wastes money. Practically every penny it spends is a waste, if not an active instance of economic destruction, but it has spent only about $1 billion of the many billions set aside for it. (Oddly enough, in Washington, the big beef with HAMP is that it hasn’t spent enough of the funds appropriated to it. That kind of thinking is how you get a $14 trillion federal debt.) The worst feature of HAMP is that it hoses the people it was allegedly set up to help: struggling homeowners.
HAMP’s qualifications are ridiculously narrow and incredibly ill-designed. In order to qualify for HAMP, you have to be a reasonably good candidate for a mortgage modification to begin with. If there’s no chance in hell you’re going to be able to make even a reduced mortgage payment, the banks aren’t going to look twice at you. But at the same time, your mortgage payments have to be more than 31 percent of your income, meaning you are pressing up against the limit of what a likely candidate for refinancing looks like, assuming you have other debts, like a car loan or credit-card bills. And if you’ve been tightening the ol’ family belt and making sacrifices elsewhere in order to keep current on your mortgage payment, HAMP’s position is: Forget it. In order to qualify for a federally subsidized refi, you have to be behind on your mortgage payments: Responsible borrowers need not apply.
You can guess where this is going: According to a ProPublica investigation, about half of the HAMP applicants who were current on their mortgages were advised by their mortgage servicers to — can you guess? — stop making their mortgage payments. Because if you’re not behind on your payment, HAMP won’t help, and all the financial villains receiving HAMPouts don’t get paid.
Why stop at HAMP? We need a top down assessment of ALL Federal programs. If they do not work they are tossed. HAMP is just a symptom of the disease; typical government behavior when a program does not work is to throw more money in the pot. Fundamental reform almost never happens and cancellation is rarer than a sober night for Charlie Sheen. I do not care if it takes years what we really need is a top down reckoning for each and every program.
No MikeB, how about we blame them both. Many people blindly followed the lemmings thinking it was money from heaven, but of that number, many knew they had no business buying the house. And of course there were the flippers, etc. And yes, it was all made possible by Washington Inc. Initially fueled by the GOP's desire to promote home ownership combined with the Democrat's natural desire to make sure someone else paid for it, we found the perfect storm and realistically not until Bush's second term did the executive branch begin to sound the alarm that many private groups had seen from the beginning - Freddie and Fannie are a huge problem. But of course here the Democrats outdid all the pols in the form of Rep. Barney Frank and especially the former Sen.Chris Dodd, who took bribes - oops, sorry campaign donations and sweet mortgage deals to keep shoveling money to Freddie and Fannie and Countryside, and a few others. If any of us had done that we would be in jail. Now he is a retired senator with lovely property in Ireland.
So the solution - KILL IT. Then neither party can get rich and people can qualify or be denied based upon the real state of their financial affairs.
This is precisely what happened to us when we applied to HAMP through Wells Fargo. Worse, we were suckered into working through a 3rd party (Home Rescue LLC) who charged us a hefty fee for "representing" us to Wells Fargo. We skipped our monthly payments to "qualify", and then went through over a year of paperwork, turndowns, and then the pre-qualification farce. During the pre-qual, our monthly payments were reduced by about $200. Big deal. In the end, Wells Fargo foreclosed on us anyway - because we were so far behind on our payments! Gee, I'm sure glad the government also thought up the Cash for Keys program - we got a whopping $2500 for promptly vacating our house. Thanks for nothing.
"Sorry -- that's too complicated. Let's blame people who bought houses they couldn't afford. THAT is something we can understand!"
Actually, YES. Let's blame homeowners who bought homes they couldn't afford. Did anyone put a gun to their heads and force them to sign on the dotted line?
As I told a customer yesterday, everyone is to blame for the mortgage mess - the government, who thought that they could turn home ownership into some kind of right (and most of the blame should rest squarely on it, but that doesn't get votes); the bankers, homebuilders, and contractors, who instead of using their better judgment to avoid the temptation set out by the government chose to try and maximize their profit potential; and the buyers, who have the most knowledge about their own financial situations and whether they can afford a loan of several hundred thousand dollars to begin with and thought they could get away with taking out loans with no equity put in and somehow make it work (but again, telling buyers that they share blame is not politically viable, so blame only the "greedy" bankers we must).
I like to tell everyone that I lost my home during the meltdown, but it was because of my own fault, not that of the banker. As I mentioned before, I knew the market was going south back in 2005, when I noticed a glut of realtors and excessive homebuilders developing homes, but I let my wife talk me into getting another home. At least we had the sense to walk away from a home of over $300,000 on an income of $60,000, and bought a smaller home for $217,000, but even that turned out to be too much.
As for HAMP, that program, as Kevin, mentioned, was never meant to help the homeowner, but the likes of MikeB won't blame the government for helping setup a scam that suckered a great many Americans into its maw. Nah, what we'll see from the likes of MikeB are more calls for increased regulation, even though the government is and has always been the problem.
Mike B, what article were you reading? Nowhere in this article did Kevin ever blame a homeowner. In fact, the clear reference throughout the article is to "struggling homeowners".
Are YOU suggesting we blame the borrowers?
I'll stick with Kevin and blame Fannie and the banking/mortgage industry that is perptrating this HAMP fraud with the collusion of Obama and Geithner.
Securitization is a tool, it can be and was misused but, HAMP isn't about securitization. It's about gulling the desperate, politics and money. The reason banks and Fannie and the Administration push this scheme is to spread out the cost of the burst bubble and make sure only the taxpayers and borrowers suffer.
Kevin's analysis is spot on. I have a neighbor who went through this and got the entire,"skip your payments, we lost the paperwork, you don't qualify and now you owe us late fees" runaround. HAMP stinks, the only good thing about it is that it didn't spend all of its appropriation.
Most people don't understand money, not even the difference between a percentage of a sum, and a number of actual dollars. This is why liberals talk about profits in numbers of dollars, and things they favor as a percentage of something.
Most people also figure there is no profit for a real estate agent or banker in putting them into a loan they can't pay for, so they trust the bank to evaluate their financial feasibility. Kevin has shown how there are great financial incentives for exploiting customers. And they get to blame it all on government for setting up the rules, which is even somewhat true. A bank could require a 20% down-payment, but apparently the banks are supposed to make lots of risky loans so everyone can own a house ... until it gets foreclosed for non-payment.
So why don't schools teach kids about real math? This isn't differential calculus, after all. Maybe they could skip a few hours of liberal ideology to explain how math works at a low level. Then people might be able to understand loans.
Don't get me wrong: I put plenty of blame on people who bought houses they couldn't afford, too. There are a lot of fools, knaves, and miscreants in this world (and on a bad day I'm all of the above), and there's plenty of blame to go around.
But HAMP is a pure scam, designed with malice aforethought, designed mostly to serve the interests of Fannie Mae, the mortgage industry, and Barack Obama's re-election campaign.
How do you think this program would poll in the WSJ poll recently announced? I am sure most of the public thinks this is a generous program to help the unfortunate. That this program isn't cut is a tribute to the belief that we are screwed on the budget. A lot of very unserious or misinformed people in the land.
I am a mortgage professional. My institution does not participate in the HAMP program but we do offer HARP loans - the Home Affordable Refinace Program. First, to validate your comments, I speak daily with clients rejected by HAMP. Most often, these clients have 740+ credit scores, back end (including other revolving and installment debts) debt-to-income ratios of under 45%, and 24+ month history of on time mortgage payments - and they have been told they need to be late on their mortgage to qualify for HAMP. They are unwilling to do so. The sole reason these clients don't qualify for a traditional refinance is their loan-to-value ratio - many owe more than their homes are worth.
Here is my question to you, Kevin: what is your opinion of the HARP program. The clients that qualify meet the above criteria (with some flexibility on DTI) - in general they pay their mortgage on time, have steady, adequate, and fully documentable income, and good credit history. Their only black mark is their homes' value vs. loan balance. While it is true that many clients bought "too much home," a fact I will not dispute, this program seems fair. The clients who have done all the right things receive some relief. Would love to hear your thoughts.
I'm a bankruptcy lawyer who deals with debtors in HAMP everyday and I can tell you from firsthand experience it is absolutely a scam of criminal proportions. Everything in the article is right on about how it works, but what was not mentioned was how they tell debtors to disregard foreclosure notices because the loan mod will stop it once they are approved. Then about a week before the foreclosure sale, they call and say "sorry, your application has been denied." That leaves Chapter 13 bankruptcy as the only option and they have only a few days to get it filed. I've had clients who've said they received time sensitive paperwork in the mail after the deadline has passed, mortgage servicers tell them they're approved but don't enter the info in the computer at all, lose paperwork, etc.
I advise my clients not to apply for HAMP if at all possible and just go ahead and reorganize their debts in Ch. 13 or just consider moving and surrendering the home. I will also say that not all of the debtors are ignorant fools who applied for homes they couldn't afford. Most of those debtors were foreclosed on two years ago. Now we're dealing with the more responsible citizens who are losing their homes because of job losses, not irresponsible borrowing. I've handled cases for family friends who were wealthy but lost their jobs at age 60 and HAMP screwed them out of their homes which they had lived in for more than 15 years. To those who think this is about irresponsible people getting what they deserve, you don't know what you're talking about.
this is a good assessment of HAMP, which even little Timmy G. @ the Fed admits was to help smooth out the flow of f.c. properties back to banks - vs inundating them with homes to sell @ 75%.
the homeowners who got suckered into temp loan mods were especially badly taken. they paid in their last bottom dollars to bailed-out banks that then (surprise!) rejected their rework app. many a retirement account was emptied out by hopeful homeowners who instead just enriched banks already enjoying record profits.
it really is a crime, a scan. the hunger for origination fees built the bubble and the hunger and greed for rework incentives is finishing the job.
between the huge f.c. repossessions and the tax lien purchases by dummy companies the banks set up, the stock of homes owned by banks is astounding. a substantial percentage in many states, a wholesale wealth shift unprecedented in American history.
Just a note to say how much I enjoyed "The Politically Correct Guide To Socialism." It was insightful, funny, and should be required reading in all colleges and universities... but, sadly, won't be.
I'm sorry, but his analysis is not correct. I know, because I work for the HAMP program and am also a conservative since birth. Do I wish the program ever had to exist? No. Do I think it is the lesser of a hundred evils? Unfortunately, yes.
The objective of HAMP was to help struggling homeowners BEFORE they burned through their 401(k), their children's education or their retirement savings. It is a fallacy you need to fall behind on your payments to qualify. You only need to show that you went through a life altering event that changed your financial situation. That includes, but is not limited to, divorce, loss of a job or a new job that pays significantly less.
The program was never to designed to help everyone who was struggling; only those who could still afford to make a reduced payment. That has happened to over 600,000 homeowners by an average of $500 a month. That is a significant boost for all of those people. I volunteered at the phone banks and listened to their stories. 99% of the people don't want to make the phone call. They wish they could be in a better situation, but can't. I agree that there are hardships in the program, but Treasury is listening and trying to make adjustments. The biggest hurdle? Getting the Servicers to participate, but understandably so. It isn't easy to turn the Titanic around, but I'm glad to see that we are at least trying.
Brad Maaske at Fresno's radio station KMJ has had a real estate show on Saturdays at noon for several years. He also has a mortgage business and has been lamenting this program for two years now. No one ever seemed to qualify.
And why would they? Banks lowering the principal of hundreds of loans reduces their reserve and may make them insolvent. Which most of them are after the meltdown, bailouts notwithstanding. But being insolvent and admitting it are two different things.
Maaske finally came to the same conclusion that Kevin Williamson did about a year ago. When he explained what the scam was, it was shocking. Another radio show host picked it up too, but the details are hard to understand when listening on radio. Besides, what influence does Fresno have? It just feeds the world... no big deal.
Kevin - I love your work, but there's a lot you miss in this article. I'm a lawyer who specializes in HAMP, and borrower lawsuits brought arising out of HAMP-gone-bad. The reason that borrowers get put into trials but then do not get permanent modifications is the same reason they got bad loans in the first place - HAMP allowed for trial period eligibility determinations to be made based on stated income. No surprise, many borrowers lied, or couldn't prove their income to get the permanent mod.
HAMP's NPV test is designed to only let in loans where it is economically better to modify instead of foreclose. If foreclosure is better they do not make it through the process, and this is as it should be. Borrowers are never worse off for having tried to get HAMP - they were in default anyway. True, they maybe made some extra trial payments they could have put toward some other purpose. But those payments repaid their bona fide debt, and let them stay in their homes a bit longer.
As far as encouraging default, the only alternative is to modify loans for folks who are current. Why shouldn't everybody get that? I'd like my mortgage reduced too. Why not? Default is an imperfect way of sorting out the deserving, but you need some criteria, and I can't think of a better one.
The biggest error of your article, though, is the statement that the servicers collect HAMP subsidies even when they foreclose. That cannot happen. Only if a permanent modification is achieved does the servicer get the incentive.
All that said, your overall conclusion is right. The program should be killed. At its best, it gives a tiny nudge to servicers to do what is already in their best economic interest (thus unnecessary) and, at its worst, has many of the problems you describe. The worst problem, though, which everyone misses, is that the permanently modified loans have giant balloon payments due at the back end of the loan. Does anyone really believe those will ever get paid? Already, just in the first year or so of the program, even the permanently modified loans under HAMP have a 50% re-default rate even under the reduced payments.
Not the banks which are servicing the mortgages; they're being paid to bring in money, and not to reduce the amount owed.
So how eager will they be to participate in this program? Only to the degree that not seeming to co-operate would create problems with the Administration.
HAMP should be ended because it hasn't worked. And is unlikely ever to be effective.
