Forecosure Avoidance Programs = Failure

On October 18, 2011 by Karen



The following is taken almost verbatim from a Tuesday, October 11, 2011, article by Ken Harney found in Inman News™. Rather than trying to summarize, I edited to leave in highlights of this important “admission” by a group other than homeowners that the government programs have not/are not working. They, like we the people, weren’t pleased with the results. I’m thrilled about that – now anxious to see if they do anything meaningful about it.

Following are excerpts from that article:

Earlier this month, the House Financial Services Committee looked at the performance thus far of the Obama administration’s foreclosure-avoidance programs.

Discussed were the record of HAMP (Home Affordable Modification Program), HARP (Home Affordable Refinance Program), Federal Housing Administration’s Refinance Program, and the Emergency Homeowners Loan Program.

These programs were all a part of the Making Home Affordable program the government set up to help homeowners.

$75 billion was initially set aside for HAMP and HARP programs whose goal was to keep millions of troubled owners out of foreclosure.

Since then, a variety of other programs have been implemented to give bridge loans to borrowers with financial emergencies needing a bridge loan, and a plan to put underwater conventional mortgage borrowers into more favorable FHA loans.

Here’s a brief overview of the results of the programs as presented at this meeting:

1. HAMP. Originally designed to help as many as 4 million troubled owners modify the terms of their mortgages and obtain more affordable monthly payments, the program resulted in approximately 800,000 permanent modifications and 106,000 trial modifications still ongoing.

Even if all the trials produce permanent modifications — which is not likely based on past performance — the program will have reached less than a quarter of the original target.

2. Emergency Homeowners Loan Program. The Dodd-Frank financial reform law authorized $1 billion to provide bridge loans of up to $50,000 for owners who had experienced sudden drops in income because of employment or medical problems.

As of Sept. 28, it has 12,000 completed transactions and is expected to use just $400 million to $500 million of the authorized $1 billion. The 12,000 funded cases were all that HUD could manage to approve out of 100,000 applications.

3. FHA Refinance Program, aka “Short Refi” – designed to help as many as 1.5 million underwater owners refinance into affordable FHA loans, funded by $8 billion originally set aside for HAMP. As of the end of September, FHA and the program’s 27 participating lenders had completed just 334 refinancings.

4. HARP. Program for homeowners who lost equity due to declining home prices but who have stayed current on their payments. Only borrowers with loan-to-value ratios above 80 percent and no higher than 125 percent are eligible. Originally projected to help between 4 million and 5 million owners, as of August it had resulted in 838,000 refinancings.

So, what happened?

In the midst of the worst foreclosure crisis since the Great Depression, with one-fifth of all homes underwater and record numbers of mortgages in serious delinquency, why didn’t the administration’s programs yield more?

Were there inherent design flaws, poor performances by federal agencies, and a general unwillingness by private lenders and servicers to participate? Or all of the above?

Several witnesses at the hearing sought to provide answers.  Among the issues:

1. Borrowers’ debt burdens were “ignored.” HAMP’s modified loan payment targets — set at 31 percent of household income — were based solely on “front-end” mortgage debt ratios rather than “back end” ratios that included second liens, credit card balances, and auto and student loan payments.

Many owners failed their trial modifications because they were loaded down with smothering debts beyond their first mortgages. Median back-end ratios went from an impossible-to-sustain 78.4 percent before modification to a “still unsustainable 61.6 percent” after modifications.

2. HAMP never provided long-term incentives for borrowers via a path to eventually regaining positive equity. It couldn’t achieve its lofty projected goals without principal reductions and write-downs of second liens and other debts.

3. The program asked loan servicers to do tasks they were poorly equipped to handle, such as underwriting. This created delays as banks had to train staff and set up administrative systems.

Part of the problem was that their unrealistically high promises were “politically motivated” for congressional and public consumption, and that the Treasury Department “had to have known” that large banks and their servicing affiliates were “totally unequipped” to handle the sort of modification volumes envisioned.

Treasury should have insisted on principal reductions as an option from the start, using its TARP bailout dollars to banks “as leverage over the parent companies of the mortgage servicers. Instead, it incompetently administered an ineffective program that seems to have better served the banks than homeowners.”


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