Professor Cole's Finance Blog

Yesterday, the Treasury Department released its December 2009 report on the Obama administration’s foreclosure-prevention plan, and it was quickly criticized. The Home Affordable Mortgage Program, or “HAMP” as it come to be known by its acronym, was announced in March 4, 2009 press release as part of the broader Making Home Affordable (“MHA”) program designed to help “up to 7 to 9 million families restructure their mortgages to avoid foreclosure”. The $75 billion HAMP was targeted at “3 to 4 Million At-Risk Homeowners” with mortgages originated prior to Jan. 1, 2009 and that are more than 30 days delinquent.

Press releases about the program have been confusing, with language similar to the ‘save or create three million jobs” mantra of the $787 billion Stimulus Package. Back on August 4, 2009, a Treasury press release announcing the July 2009 HAMP performance report boasted that “more than 400,000 modification offers have been extended and more than 230,000 trial modifications have begun” and that the program was “on track to offer assistance to up to 3 to 4 million  homeowners.”  Notice the key operative word here—“offer.”  An “offer” to help is the Stimulus-talk equivalent a “saved” job, but slightly better because you can at least measure an “offer.” The administration is still struggling with how to “measure” a saved job. 

Also note the emphasis on “trial modification” rather than “permanent modification.” In fact, not a single word was mentioned in the press release or the report about permanent modifications because there had been so few of them.

Yesterday’s headline trumpeted “more than 850,000 homeowners now with median payment reductions exceeding $500.” What this headline doesn’t tell you is that these are “trial modifications” rather than “permanent modifications.” The headline continues “more than 110,000 permanent modifications approved to date.” What this doesn’t tell you is that the actual report quantifies the number of permanent modifications at only 66,465, or only 7.4% of the 902,620 trial modifications claimed in the report; where the other ~44,000 permanent modifications claimed in the Treasury press release come from we do not know. (Perhaps they are simply bad at math?) Also not mentioned is the fact that most experts forecast a “redefault rate” (i.e., the borrower defaults on the modified mortgage)  of more than 50 percent during the first twelve months following a modification, and that this rate could be even higher should the employment situation continue to deteriorate during 2010.

The report also includes a set of four spiffy graphs showing what the administration would like you to think are “green shoots” in the U.S. housing market. What they don’t show you is the delinquency- and foreclosure-rates, which, when combined, have continued to make new monthly highs during almost every month since the HAMP was announced. From March 2009 to November 2009, the non-current loan rate, which is the sum of the delinquency and foreclosure rates, has risen from 10.33% to 13.24%--an increase of 28 percent.

This perky housing report also calls to mind the "Stimulus-talk" or "Obama-Speak" about “saving or creating” 600,000 jobs during the same time period when the Household Survey of the Bureau of Labor Statistics shows a loss of more than 5.5 million jobs. Now, we are told that we have “saved” 850,000 homeowners during the same time that an additional 1.05 million homeowners have become non-current on their mortgages. And, of course, this number doesn’t include the hundreds of thousands who lost their homes during this period—they aren’t included in the non-current loan rate once they get booted and their house sold at auction.

The latest criticism of the HAMP comes as hundreds of thousands of homeowners who have entered into “trial modification” are at risk of disqualification. The program requires these borrowers to make three monthly payments on their modified mortgages and fill out required paperwork in order to qualify for a “permanent modification.”  What is holding up the process is the troublesome paperwork. Borrowers actually have to document their income to qualify for the permanent modification, but a large portion of these borrowers originally took out “stated-income” mortgages (also known as “liar loans”) and many of these are having difficulty documenting enough income even for the modified mortgage.  Many more have lost their jobs or taken significant pay cuts that preclude them from qualifying even for the modified mortgage.

Now, I’m not a rocket scientist, but it seems pretty obvious to me that you should allow the trial modifications to continue so long as the homeowner continues to stay current on the modified mortgage. Foreclosing on these homes will only exacerbate what is already a disastrous situation in the residential mortgage market by adding to the inventory of vacant houses. Moreover, we know that a significant portion of foreclosed homes are stripped and vandalized as soon as the former owner vacates, leaving a blighted and damaged structure that is of little value to the lender and dragging down property values in the surrounding neighborhoods. It is a far better option to keep someone living in these houses by extending the trial modifications.

No one benefits by evicting these borrowers. Let them stay--and pay.