Is HAMP Setting Homeowners Up to Fail?

HAMP–Home Affordable Modification Program—is part of the U.S. Treasury’s Home Affordability and Stability Plan that was announced last March. In a nutshell, HAMP was established to encourage lenders to modify mortgages so that payments were no more than 31% of a homeowner’s gross monthly income. At the time, many Americans hoped the program would prevent the wave of foreclosures that threatened to take away home from many families as well as threatened equity for many homeowners.

While we have yet to get any definitive statistics from Treasury regarding permanent modifications, the anecdotal evidence that is starting to trickle in does not look promising. If you are paying attention to my Tweets, you will have seen many articles that document this evidence.

The first came at the end of November when Citigroup reported higher redefault rates in Q3 compared to Q2 on loans that it had modified. Sanjiv Das, the chief executive of Citi’s mortgage unit, indicated that “People are just not able to keep up with all their different kinds of debt, and they take what they can get from the bank in terms of modification, but after six months they go back to redefaulting.”

An article, “Why Many Home Loan Modifications Fail,” appeared in The New York Times on December 3, 2009. The author spent a day in a loan modification call center for Chase and Washington Mutual (whose assets JPMorgan Chase acquired). Call center representatives were having a hard time getting the appropriate documents back from borrowers once loan modifications were offered–one of the conditions that needed to be fulfilled in order for the modification to become permanent. According to the article, “Chase disclosed in November that nearly a quarter of trial modifications had failed because the borrower did not make even a single payment, and that nearly half had failed to make all three payments required before the modification could become permanent. Of those who had made all three payments, only about a quarter had submitted all the required documents.”

This trend is echoed in remarks made to CNBC’s Diana Olick by Jack Schakett, a credit loss mitigation strategies executive with Bank of America. In her December 7, 2009 column, Olick reports, “Mr. Schakett told me that of the 65 thousand trial modifications set to expire Dec. 31st with B of A, a full two thirds of the borrowers, while current on their payments, have not submitted the full documentation required to turn a trial mod permanent under the HAMP guidelines.”

As I have shared before, I believe that a homeowner’s ability/desire to stay current on their mortgage is directly impacted by two things: employment and equity. With unemployment still running at staggeringly high numbers and almost a quarter of all homeowners underwater on their mortgages, it does not surprise me that loan modifications are not working. Even with loan modifications, there are many homeowners that still do not have the income to pay their mortgages because of other debt, loss of job, or cut in income. There are other homeowners that might be able to afford their loans–modified or not–but have simply lost the desire to pay because they are so far underwater that they don’t feel they will ever get above water.

I think the greater issue is more fundamental than that. Modifying a mortgage does not change the fact that many of these borrowers that are defaulting on their mortgages had to lie about their income and revolving debt in the first place by applying for no-doc loans–the so-called “liar’s loans” that required no documentation to verify a borrower’s stated income and debt. I seriously doubt that in a failing economy, many, if any, of these borrowers’ situations have improved to a point where they are making more money or have less debt then they professed to have at the time of the initial loan application. Is it any wonder that they are not providing the required documentation to make their loan modifications permanent? There probably is no documentation to support their statements…still.

As much as I’d like to see HAMP succeed because the housing market desperately needs to stem the tide of foreclosures, I am starting to feel that the program is neither appropriate nor compassionate.

An appropriate program would be one where the time, effort, and resources being expended would have an equivalent payback–even if it is a longer term benefit. A compassionate program would be one where the modifications that are being put in place allow a family to become self-sustaining over the long term. Neither of these situtations seem to be happening. Lenders are spending many man hours tracking down documentation that probably doesn’t even exist. More importantly, I really feel that this program is actually setting families up to fail. Instead of encouraging all Americans to face reality and live within their means instead of their desires, the Government is prolonging the inevitable by giving homeowners HAMP-colored glasses that prevent them from seeing what adjustments THEY need to make in their lives in order to live within their means.

I think the best way that we can get back to a “normal” housing market is for families to have the ability to live within their means. I don’t want to see families lose their homes, but I can’t think of anything more unkind than to encourage a family to stay in a home that they will never be able to afford because the cost of homeownership is so much more than just a monthly payment that has been modified for a short time. Is the government also willing to help modify the accompanying property taxes, utilities, and maintenance on a house that a family could never handle in the first place?