|by Chris Arnold|
People know there’s a foreclosure crisis. Yes, the housing market crashed and lots of people are losing their homes. But most people don’t realize that about half of foreclosures don’t need to happen.
That is, about half the time, when a homeowner falls behind on their mortgage payments, there is a better alternative that will keep the homeowner in their house and result in a smaller loss for the lender (often investors in RMBS).
When president Obama came into office, in the spring of 2009, he started the Home Affordable Modification Program (HAMP.) The goal was to prevent 4 million foreclosures by modifying the terms of people’s mortgages in cases where lowering a borrowers interest rate, and perhaps forgiving some principal, would be “NPV Positive” for the lenders. In other words, the goal was to modify loans in cases where it made better business sense for the lender to keep people in their homes instead of foreclosing. This also helps the housing market and the broader economy by reducing the overall numbers of foreclosures and the losses associated with them.
The problem is, while many economists thought that 4 million people estimate was a pretty good one, 4 years later the program has only reached about 1 million people. There have also been 3.4 million non-HAMP mods over this period but data on the quality of these mods remains murky.
Meanwhile, according to recent data compiled by the JCHS (State of the Nation's Housing, 2012, Figure 20) there are still roughly 3 million seriously delinquent loans in (or heading into) the foreclosure pipeline.
The JCHS recently hosted a panel of people working on the front lines to prevent foreclosures. All are strong advocates for increasing the number of loan modifications in order to help housing markets. They said there are still serious problems implementing the HAMP program, and that if some changes were made, there is still time to prevent tens, and perhaps hundreds of thousands of unnecessary foreclosures.
The Panelists were (pictured above, right to left):
- Gary Klein, Partner, Klein Kavanagh Costello, LLP
- Mike Calhoun, President, Center for Responsible Lending
- Bruce Marks, CEO, NACA (Neighborhood Assistance Corporation of America)
I hosted the panel, and these are the highlights of the recommendations from the group.
Gary Klein has been suing the nation's largest banks for their alleged failure to provide loan modifications for people who should qualify for HAMP. Often, he said, the major banks that “service” the mortgages on behalf of investors (the banks are responsible for qualifying homeowners for HAMP) drag out the process for far too long. Homeowners can stay stuck in limbo trying to qualify for the program for 6 months, 9 months, sometimes for more than a year. Klein says the HAMP agreement/contract documents signed by the banks and the homeowners state that the bank has 3 months to make a decision. This agreement is struck when a homeowner begins the “trial period” of the HAMP program and starts making lower monthly payments. Klein recommended that if a homeowner stays current, making payments, for those 3 months, and the bank has yet to make a decision, the homeowner should be automatically qualified for HAMP and receive a permanent loan modification through the program. Currently there are more than 59,000 active HAMP trial mods according to the Treasury Department. So Klein would like to see many of those automatically converted to permanent loan mods.
Mike Calhoun has been studying the foreclosure crisis for years now at the Center For Responsible Lending. He urged the regulator for Fannie Mae and Freddie Mac (the FHFA) to allow for loan modifications involving principal write-downs. Loans not backed by Fannie and Freddie have been receiving principal write-downs more frequently as private investors calculate that it can make good business sense to avoid a foreclosure this way. Calhoun urged Fannie and Freddie to follow suit.
Calhoun also suggested expanding the administration’s HARP II refinancing program. He’d like HARP II to permit delinquent borrowers (who are currently not eligible) to refinance into today’s low market interest rates. In many cases, Calhoun said, just cutting a homeowner’s interest rate to what is currently available on the market can be enough to prevent a foreclosure.
Bruce Marks’s organization NACA has been functioning essentially as an outsourced loan modification “qualifier” for all of the nation’s largest banks/ loan servicers. Marks said NACA has enabled more than 200,000 homeowners to avoid foreclosure with a loan mod. Like Calhoun, Marks would like to see more principal write-downs to avoid foreclosures. Marks also said he wished that bankruptcy judges had been allowed to help rewrite the terms of mortgages (this was proposed by federal lawmakers in recent years but couldn’t get approval in Congress).
One hopeful sign, Mike Calhoun said, is that the quality of the loan modifications done by loan servicers outside of the HAMP program appears to be improving. But the panelists said the exact terms of many of those modifications remain unclear.