Posted on Friday, December 17, 2010
The Obama administration's signature anti-foreclosure program will ultimately aid less than a quarter of the nearly four million distressed homeowners it was originally supposed to help, according to a Congressional report released Tuesday.
President Obama initially portrayed the $50 billion initiative, which lowers mortgage payments for borrowers, as a crucial means of allowing people to hang on to their homes. But the program has been hobbled from its inception and is now forecast to spend only $4 billion of the money allocated, plus another $8 billion on other programs created to support the initial effort, according to projections by the Congressional Budget Office and the Congressional Oversight Panel, a watchdog group created to keep tabs on the bailout.
In the end, the program will prevent no more than 800,000 foreclosures, the watchdog panel concluded in its report. That amounts to a fraction of those homes threatened with foreclosure: More than 2.8 homes received foreclosure notices last year, according to real estate data provider RealtyTrac. The Federal Reserve expects 7.4 million homes to enter foreclosure this year through 2012. It recently revised its projection up from 6.5 million as the crisis has worsened.
The Treasury Department official overseeing its bailout programs admitted Monday that the mortgage modification initiative will not meet the goal laid out by President Obama when he announced the program in February 2009. Then, Obama said it would enable of "as many as 3 to 4 million homeowners to modify the terms of their mortgages to avoid foreclosure."
"I think it's apparent from our numbers that we will not have 3 to 4 million" permanent modifications, said Tim Massad, Treasury's acting assistant secretary for financial stability, during a conference call with reporters on Monday evening.
That statement marked the first time the Obama administration has publicly acknowledged that its foreclosure-prevention program will fail to satisfy its original goals.
In its latest report, the Congressional Oversight Panel sharply criticized Treasury for failing to disclose much earlier the extent of the problems afflicting its foreclosure initiative, known as Home Affordable Modification program, or HAMP. The administration's power to alter the program using the funds already allocated expired in early October. Treasury now lacks legal authority to craft an initiative that might produce better results.
"Treasury's reluctance to acknowledge HAMP's shortcomings has had real consequences," the bailout watchdog declared in its report. An "untold number of borrowers may go without help -- all because Treasury failed to acknowledge HAMP's shortcomings in time."
Housing experts have declared that the administration's botched program leaves the broader housing market and the economy susceptible to more shocks ahead, as foreclosed homes pile up, pulling down real estate values.
"Having dragged their feet through various revisions to the program, and with their ability to now redesign it shut down, they have ensured HAMP its place in the trash bin of history," said noted bond analyst Joshua Rosner, a managing director at Graham Fisher & Co. who analyzes housing.
The abundance of data in the oversight panel's report presents a picture of a flimsy government program that has been swamped by an unceasing flood of homeowners landing in trouble and houses sinking into foreclosure. Since the program began, nine new foreclosures have been initiated for every permanent loan modification that has been approved, the panel found.
Under the program, troubled homeowners who qualify are enrolled for three-month trial periods during which they make lower monthly payments. So long as they make their payments on time and document their distressed situation, borrowers are supposed to be automatically rolled into so-called permanent modification plan in which their monthly payments stay relatively flat for five years.
Some homeowners have been stuck in the trial phase for as long as 20 months, according to the Congressional Oversight Panel. The chairman of the panel, former Delaware Senator Ted Kaufman, called that "egregious," during Monday evening's call with reporters. He singled out for criticism the giant banks that collect mortgage payments--servicers, in industry parlance. He also blamed Treasury for failing to hold the mortgage companies to account.
"There is extensive anecdotal evidence servicers aren't living up to the rules," said Kaufman, a Democrat. "Treasury is not nearly being as forceful as they can."
The panel asserted that Treasury can levy penalties on mortgage companies for failing to abide by the program's rules. Treasury insists that it lacks such authority, though it clearly has the power to claw back the incentive payments it makes to servicers for enrolling homeowners in five-year modification plans. Despite heavy criticism from Congress, Treasury has withheld no payments. Treasury is now considering withholding payments for 132 modified loans, the panel's report notes.
Even those homeowners who have successfully navigated the Kafkaesque bureaucracy required to secure a loan modification have rarely received significant relief. Nearly 95 percent of such homeowners have ended up with higher principal balances after receiving a modification, according to the report. More than 76 percent of homeowners in the program owe more on their mortgage than the home is worth, a situation referred to as being "underwater."
About 10.8 million, or 22.5 percent, of all homeowners with a mortgage were underwater as of Sept. 30, according to CoreLogic, a data provider.
A range of housing experts have long argued that the foreclosure crisis can only be stemmed by a more aggressive program that shrinks the outstanding balances on mortgages. The Treasury and the financial industry has long resisted such calls on the grounds that it would cost someone money--either the banks or taxpayers.
Writing down principal balances on mortgages would give people whose are worth less than they owe greater incentive to stay current on their payments, say experts.
"Negative equity is a primary factor holding back the housing market and broader economy," Mark Fleming, CoreLogic's chief economist, said in a Monday statement.
According to the oversight panel's report, homeowners are falling further underwater after their loans are modified under Obama's plan. After their loan is restructured, the typical HAMP homeowner owes $1.25 on their mortgage for every $1.00 their home is worth.
The oversight panel zeroed in on the problem of underwater borrowers as a key challenge for the economy. With so many people underwater, many homeowners who would like to sell their properties and move to parts of the country with more abundant jobs are stuck in place. Some borrowers have opted to simply forego making payments and relinquish their homes to foreclosure.
"Negative equity can restrict the ability of homeowners to move, whether for family reasons or to pursue greater job opportunities, since home sale proceeds will not be sufficient to repay their loan," the report states. "It also provides an incentive for borrowers who can afford to pay their mortgages to stop paying intentionally and walk away."
This dynamic seems likely to worsen before it gets better, with many analysts anticipating that housing prices will continue to fall in much of the country through the end of next year. Housing prices have fallen by 30 percent nationwide since early 2006, according to the S&P/Case-Shiller Home Price Index.
Massad, the Treasury official overseeing the rescue program, said the department grasps that underwater borrowers are playing a significant role in exacerbating the foreclosure crisis. He emphasized that Treasury recently launched additional programs aimed at shrinking balances for people whose homes are worth less than they owe the bank.
But despite these programs, mortgage companies have reduced the principal for only three percent of the homeowners in the HAMP program, according to the the panel's report.
"Clearly, it's a big, big problem," said Kaufman.
Rosner and other experts assert that Treasury should force lenders to write down second mortgages, such as home equity lines of credit--a popular way in which homeowners turned increased real estate values into the cash during the boom. And if writing down those loans still leaves borrowers unable to make their monthly payments, primary mortgages should be written down, he added.
But that approach has been emphatically rejected by Treasury and the large banks, who are themselves on the hook for many second mortgages. While the largest four American banks generally sold off primary mortgages to investors and now merely collect fees for handling the bills, these same four banks themselves hold 43 percent of second mortgages--an amount reaching $420 billion, according to the panel.
That, say analysts, largely explains the dismal state of the administration's foreclosure program and Treasury's unwillingness to champion the only clear remedy: writing down principal balances. Indeed, the oversight panel concludes that forcing lenders to absorb losses on second mortgages could leave the four biggest banks severely crippled.
"Treasury's HAMP program has, in policy and practice, been a colossal failure," Rosner wrote in an e-mail. "Rather than working in the interests of borrowers and investors, whose interests are fundamentally aligned, HAMP appears to have been designed to shield banks and their captive servicers from the negative financial impact that a reasonable resolution to the crisis would require."
Shahien Nasiripour The Huffington Post.