This article first appeared in the St. Louis Beacon, Feb. 11, 2010 -Nearly a year after President Barack Obama announced a government-backed mortgage modification plan to help struggling American homeowners, the program is under fire from housing advocates who say it lacks teeth and from a congressional oversight panel that questions its effectiveness.
Rep. Edolphus “Ed” Towns, D-New York, chairman of the House Committee on Oversight and Government Reform, announced Saturday that his panel will investigate the U.S. Treasury Department’s Making Home Affordable program because of complaints about its efficiency and accountability.
A major component of Making Home Affordable is the Home Affordable Modification Program (HAMP), which offers financial incentives to servicers and lenders to modify loans, reducing the monthly payments of qualified borrowers to no more than 31 percent of their monthly income. Participation in the program is voluntary for lenders.
When he announced the program, Obama said it would enable as many as 3 million to 4 million U.S. homeowners to modify the terms of their mortgages to avoid foreclosure. By year’s end, the Treasury Department said that 900,000 borrowers had gotten three-month trial modifications from their lenders, though just 66,465 of those had been made permanent. The average monthly savings for borrowers who get a permanent modification is $516.
Critics say that loan servicers and lenders are dragging their feet and remain unwilling to negotiate effective long-term modifications -- indications that HAMP hasn’t addressed the basic problems that have nagged homeowners since the foreclosure crisis started.
“What’s happening is widely recognized as not working. It’s not enough,” said Kathleen Day of the Center for Responsible Lending , a nonprofit organization that fights predatory lending. “There have to be mandatory rather than voluntary loan modifications. For three years, the industry has been saying they can do this. We’re seeing they haven’t and can’t.”
In a news release, Towns cited findings of the Congressional Oversight Panel that U.S. home foreclosures have increased faster than the rate of new HAMP trial modifications, by more than 2 to 1 -- and that certain lenders have shown “dismal progress in modifying loans.” The Congressional Oversight Panel reviews economic actions taken by Treasury and financial institutions.
Appearing on ABC’s “This Week” show on Sunday, U.S. Treasury Secretary Tim Geithner defended the Making Home Affordable programs, saying they are providing cash flow relief to hundreds of thousands of Americans and have been “enormously effective” in helping to stabilize the housing market.
“We believe we’re still on a path to be able to reach many, many more American households,” Geithner said.
Loan Modifications Still Slow in Coming
Five years into the U.S. mortgage crisis, nonprofit housing counselors who work with troubled homeowners say that foreclosure mitigation remains an often painfully slow process, often taking months of back-and-forth negotiating with lenders and servicers.
“We’re still seeing long turnaround times as far as getting some type of approval or even having a case assigned to an actual decision-maker,” said Eric Madkins, senior housing director for the Urban League of Metropolitan St. Louis, which has 12 counselors assigned to assist troubled homeowners. “What we hear on our end is that there is a log jam or that the lenders are inundated with so many requests or so many proposals.”
Madkins said the process is hard on anxious homeowners who are not only fearful of losing their homes but are kept in limbo waiting for a decision.
“One of our most difficult challenges is managing the expectations of the borrower,” he said.
Madkins said the success rate varies by lender. If a homeowner’s debt-to-income ratio doesn’t qualify for a HAMP workout, some lenders might have an “in-house” solution, while others offer no options. The process is often hampered by paperwork and repeated requests to resubmit the same information.
“There is so much bureaucracy, so much documentation. There has to be some way to streamline the process,” Madkins said. “It seems like it takes longer to mitigate a loan than it does to close a new loan, from an origination standpoint.”
Madkins would like to see a timetable established once a modification proposal is submitted to a lender, similar to the time windows that lenders and borrowers work with when purchasing a home.
As part of his investigation, Towns sent a letter to Geithner asking for details of the HAMP process, including the criteria used to determine whether a homeowner is eligible for the modification program. Towns also expressed his concern that lenders do not communicate clearly with homeowners.
“Moreover, if a homeowner is denied a permanent mortgage modification, the specific reasons for the denial are not revealed,’’ Towns said in the letter. “Finally, Treasury has not established a process for homeowners to appeal the denial of a permanent mortgage modification.”
Cushioning the Fall
Though imperfect, the Making Home Affordable program has at least established some rules that lenders must follow to get the financial incentives offered by the government and funded through the Troubled Asset Relief Program, said Day of the Center for Responsible Lending.
“But a lot of it is carrots with no stick -- and they must do something to make it mandatory,” she said.
Day said that most lenders still refuse to take the step that would go the furthest in keeping people in their homes: writing down the principal on loans.
“What you really need is principal reductions -- which the industry hates because that is a bigger hit on their books than reducing interest rates,’’ Day said. “If you reduce interest rate, you don’t have to take a write off. Late payments get rolled into the principal. If you reduce the amount of the principal owed, that actually reduces their assets.”
Day said that the Obama administration has resisted calls to force lenders to make principal reductions.
“At some point people are just going to have to face reality,’’ she said.
Madkins said that most of the modifications he sees involve extended loan terms and lowered interest rates. Principal reductions are rare -- which can leave homeowners paying far more than the “true value” of their homes in today’s real estate market. He expects that any public policy solution to the foreclosure crisis will spread the pain among all parties involved.
“There is going to be loss suffered,’’ he said. “It really comes down to how much the loss will be for the investors, the mortgage lender or servicer and the homeowner. At the end of the day, it comes down to how much loss the parties are willing to accept.”
In the meantime, the Treasury Department is planning to roll out a new foreclosure alternative program in April called the Home Affordable Foreclosure Alternatives program – or HAFA, a Treasury official told participants at the American Securitization Forum in Washington earlier this month. The program will provide financial incentives for lenders and borrowers who pursue short sales and deeds-in-lieu instead of foreclosures when it is clear that a loan modification won’t work. Among the incentives: Borrowers would receive $1,500 for relocation and servicers would get $1,000 for administrative costs.
With unemployment now driving the foreclosure crisis, many homeowners simply don’t have enough income to pay their mortgages, Madkins said. The HAFA program would help families who are forced to leave their homes make the transition into other living situations.
As the foreclosure crisis continues to run its course, Madkins said that good public policy can at least cushion the fall.
“It’s the difference between slamming to the bottom and cushioning to the bottom. I’d rather see a soft landing to the bottom instead of an abrupt crash,” he said.
