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.
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.
Nobody knows how many, but a great many homeowners apparently followed that bad advice, skipping a mortgage payment or two (or a half-dozen) in order to qualify for HAMP. They were put into “trial” modifications and given a new, lower mortgage payment to make. On a “trial basis.”
When the time came around for a permanent modification, many of these homeowners were rejected. The paperwork is a bureaucratic nightmare, and it’s easy to find an error in the documentation, especially if you’re looking for one. Or for the mortgage servicers to “lose” documents. Complaints about this have been rife. In the worst-case scenarios, borrowers who intentionally fell behind on their mortgages found themselves suddenly facing huge bills — late fees, back payments to make up the difference on the reduced mortgages, etc. — due all at once. Most of these people didn’t have a lot of money in savings, naturally, seeing as how they were struggling to pay their mortgages. So the mortgage servicers, who also earn fees from foreclosures, collected their HAMP subsidies and then had a much easier time proceeding to accelerated foreclosures.
HAMP, in other words, is worse than a multibillion-dollar waste of our money: It’s a rip-off, perpetuated by the very same people who have been ripping us off for years.
Kill it. Kill it dead.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism,just published by Regnery. You can buy an autographed copy through National Review Online here.