Next week the House Financial Services Committee will consider bills to end four mortgage "assistance" programs including the Home Affordable Modification Program (HAMP). Neil M. Barofsky, Special Inspector General for SIGTARP has noted in past quarterly reports to Congress that HAMP has been beset by problems and continues to fall dramatically short of any meaningful standard of success.
SIGTARP's January 26, 2011 quarterly report to Congress noted that there were just fewer than 522,000 ongoing permanent loan modifications in force as of December 31, 2010 with approximately 238,000 of those funded by TARP and Fannie Mae and Freddie Mac funding the remaining modifications.
The US Treasury claimed two years ago that HAMP would "help up to 3 to 4 million at-risk homeowners avoid foreclosure... by reducing monthly payments to sustainable levels." Since this claim, Treasury has refused to provide an estimate, goal or projection of the permanent modifications it expects to complete and maintain.
One significant problem with HAMP is that it often requires borrowers to make "trial modification payments" that are less than the full mortgage payment due. Mortgage servicers maintain billing systems riddled with fraud and it is commonly known that when a servicer receives a monthly payment less than the amount due, the servicer places all payments after that into a "suspense account." Pooling and servicing agreements allow the servicer to use those funds for investment purposes and to borrow against them. Servicers may retain late fees, administration fees, home inspection fees and all manner of fees that HAMP modifications practically encourage servicers to generate.
The most recent SIGTARP report notes that servicer failures are widespread,
From the repeated loss of borrower paperwork, to blatant failure to follow program standards... and the servicers' conflicts of interest in administering HAMP - they too often have financial interesets that don't align with those of either borrowers or investors - have been described by both SIGTARP and COP.
The US Treasury Department has done little to pressure servicers to comply because it alleges that it "fears" that servicers won't participate in the program if they are forced to comply with their contractual obligations.
Republicans Jim Jordan of Ohio and Patric McHenry of North Carolina introduced a bill to terminate HAMP last month. Other Republicans plan to introduce bills to terminate the FHA refinance program and funding for the Emergency Homeowners Relief Program and Neighborhood Stabilization Program.
Democrats plan to fight these efforts and Representative Barney Frank of Massachusetts said that he was "disappointed" by Republican efforts to end these programs.
A broader view on housing suggests that the purpose of HAMP and most other loan modification programs is merely to distract homeowners and keep them from walking away all at the same time. Banks and servicers seek to turn over housing in a predictable, gradual manner foisting the cost of losses onto several successive buyers. If prices can be made to fall slowly, it becomes possible for real estate agents using aggresive sales tactics to sell a house to a buyer who then takes a small loss who later sells it to another buyer who takes a small loss. And each buyer in this chain will buy believing that he's getting a good deal because prices have "already" fallen.
Investors certainly have an incentive to modify loans because they can often persuade a homeowner to pay for years on a loan that exceeds the value of the house, something that is not possible in the event of a foreclosure. And servicers and investors are free to modify loans without misguided government policies funded with taxpayer money that is often collected from renters to pay the mortgages of homeowners.
The real problem interfering with loan modifications is the inability of investors to control servicers. Servicers have set up complex, fraud laden systems designed to extract every last dollar possible out of a default. Pooling and servicing agreements richly compensate servicers for defaults and foreclosures and the opaque accounting and reporting systems servicers use frustrate the ability of investors to monitor fraudulent billing, double billing and other fake charges.
Finally, there is significant risk of widespread fraud and collusion between the trustees for mortgage backed securities trusts and servicers. The certificate holders are the outsiders who aren't entitled to much information. The trustees and servicers are often the architects of and participants in a system designed to extract money from borrowers and investors.
Federal programs to "assist" borrowers to pay their mortgages are misguided and encourage fraud. A better use of federal funds is anti-poverty programs. The idea of using the tax money paid by a family of low income renters to pay the mortgage of a middle class family with a $3,000 a month mortgage is more than unfair. It is a monstrosity. The government could also move to pressure banks, trusts and servicers to behave better and condition their cooperation on continued government support. Many people have forgotten that the Federal Reserve and the government are offering unprecedented support to rich market participants like banks, servicers, and investors. That this ongoing support has as yet come without strings attached is a vile commentary on the American public's tolerance for a good fleecing.