The Congressional Oversight Panel has issued another typically detailed report, this one focusing on the Administration’s widely criticized mortgage mod program, HAMP. HAMP is so widely recognized as being a failed program that when a group of bloggers met with Treasury officials last August, even Timothy Geithner didn’t try to pretend the program worked very well. The defense offered was that it “succeeded” by flattening what would have been a spike in foreclosures by getting some people into trial mods that failed and delaying the inevitable for a few months. Of course, that view conveniently omits the fact that servicers told borrowers that were current to quit paying so they could qualify for HAMP, plus the fact that the borrowers that did not get “permanent” mods also were assessed missed payments and late fees.
But the focus on HAMP has been mostly about how badly the program worked operationally, and less on the crappy design of the misleadingly-labeled “permanent” mods. Only in the US could a kick the can down the road strategy be branded as “permanent”. The HAMP mods are five year payment reductions. They don’t reduce principal, when studies and the experience of distressed investor Wilbur Ross have found that meaningful principal mods are far more successful than mere payment reduction plans. By contrast, HAMP leaves 95% of borrower in a worse negative equity position than before.
Worse, a formula in the HAMP program allowed banks to focus the mod program on the high negative equity homes. These were the ones the banks with large second mortgage portfolios were least likely to foreclose upon, since in those cases, the second lien would clearly be wiped out. Admittedly, they would also be the ones where a mod is a bigger win for the investor. Nevertheless,one has to wonder how much HAMP was designed with the “save bank equity by shoring up second mortgages that should be written off” objective in mind, versus its stated aims, particularly in light of the level of second liens versus bank Tier One capital:
Bank of America 83%
JP Morgan 78%
The facts presented in the latest COP report are far uglier than they might appear on a superficial reading. The first year default rate is 21%, if you can believe the Treasury figures (the COP report notes that Treasury lacks “complete or valid” information on 13% of its permanent mods).
Not bad, you might say, in contrast to other factoids about mod programs, where six month redefault rates have been reported to range from 20% to 40%. But many of those so-called mod programs are anything but. They typically include service payment catchup plans (a hoop servicers in the past have forced borrowers to go through before even considering them for a mod) which often result in borrowers facing <strong>higher monthly payments. HAMP should have done much better by virtue of putting borrowers through a trial mod, plus offering deeper payment reductions than typical private mods. How much better is an open question, but a 21% first year redefault rate says the program will fall far short of Treasury’s goal that the program would show only 40% defaults over the five year “permanent” mod time frame.
The report is chock-full of troubling information. For instance:
The Congressional Budget Office (CBO) last month projected that Treasury will spend only $12 billion on all TARP housing programs, including HAMP and the Hardest Hit Fund, out of the $45.6 billion in TARP funds allocated for those programs….
Treasury has declined to state publicly any metrics or benchmarks by which HAMP should be judged, a fact that has frustrated Congress and TARP oversight bodies, and has made clear to the Panel that it has no other unarticulated goals for HAMP
The COP report just makes clear what we already knew, that HAMP was window-dressing. Per Adam Levitin, as part of an if-anything more critical post than ours:
Ultimately, the message to take away from HAMP is that the Obama administration just isn’t serious about helping homeowners. The plight of distressed homeowners’ is subsidiary to protecting the banks from having to take serious write-downs. There’s plenty to say about the politics of that decision, but from an economics perspective, I just think it’s short-sighted. The economy will not see a robust recovery until there is serious consumer deleveraging and a stabilization of the housing market. Those two problems go hand in hand, given that mortgage debt is the biggest chunk of consumer leverage. And there really isn’t any way to deleverage consumers without there being losses for the financial sector.