The failure of HAMP
Allison put a positive spin on the fact that hundreds of thousands of homeowners have waited for several months for a final answer from their servicers. Homeowners in the trials have “benefited from lower payments … for many months” and from “having time to obtain other solutions to their needs,” he said. And that relief has come “at no cost to taxpayers.”
Kiel also links to an older ProPublica piece, from May, which spells out exactly what the weakness is in this argument:
Once they’ve been denied a permanent modification, homeowners owe the amount they were discounted during the trial. Banks often demand that the entire amount be paid as a lump sum right away or over a short period of time, causing a homeowner’s payments to swell beyond the original monthly payment.
What’s more, homeowners’ credit scores are damaged because trial payments are reported to credit agencies as delinquent or as part of a payment plan.
“Being in a trial modification if you don’t get a permanent modification is worse than having not been in a trial modification. Period,” said Diane Thompson, an attorney with the National Consumer Law Center. Worse yet, people “may have a hard time finding alternative housing because some renters check credit scores,” she said.
This is the real problem with the fact that 629,751 eligible home loans — 43% of the total — have been cancelled. In some cases, such as that of Goldman Sachs subsidiary Litton Loan Servicing, cancelled trials account for more than two thirds of the total. Treasury is trying to persuade us that those loans were still, on balance, a good thing. But I haven’t yet heard anybody outside Treasury attempt this line of argument, which indicates to me that it’s pretty unconvincing.
HAMP might well have been a success in the ways that Treasury enumerates — helping out banks on the solvency front, reducing the rate of foreclosures, that sort of thing. It was almost certainly a good idea politically, as well: you don’t hear much about the plight of homeowners being foreclosed upon, these days, certainly compared to the huge amount of noise on the subject around the time that Obama was elected president. The government is perceived to have Done Something, and the circus has moved on.
But it’s still a tragedy that hundreds of thousands of people who signed up for loan modifications — and who made all of their modified loan payments in full and on time — have had their modifications cancelled. Many of those people blame the servicers; Treasury, meanwhile, is more prone to blaming the borrowers themselves, claiming they’re incapable of verifying their income.
My feeling is that even if income hasn’t been verified, servicers shouldn’t simply cancel the loan mods if they’re performing well. And that if that’s what the servicers are doing, the incentives within HAMP have been designed very badly. That’s a Treasury failure, and it’s impossible to credibly spin it as any kind of success.