Can Treasury Fix Its Foreclosure Rescue Program?

MortgagesU.S. Treasury Officials plan to “revamp” its mortgage modification program in coming days, responding to intensifying criticism and a growing consensus that it is having a small impact on the ongoing foreclosure crisis.
The New York Times reported this week that Treasury officials have been in talks with mortgage servicers to expedite the $75 billion Home Affordable Modification Program, or HAMP.  The program provides incentives to servicers who help struggling homeowners into mortgage reduction trials, and then place them into permanent relief with lower monthly payments.
But HAMP has been plagued by delays from excessive paperwork and borrowers falling out of the program. The strongest criticism of HAMP is the absence of any significant principal reduction as more homeowners are “underwater” on their mortgages, including a growing number of prime borrowers.
The New York Times said the Treasury has still not decided the new method it will implement to help more homeowners. It reported that banking representatives have said officials are “looking at either direct cash assistance or a grace period in which borrowers could postpone payments.”
But the revamping will not likely include plans to help those “underwater” borrowers, the Times said, although officials are considering their options.
The Treasury has not called for lenders to write off loan balances out of concern such an action would jeopardize the health of banks, and further reduce the availability of already tight credit. According to the Treasury’s latest December report on HAMP, the overall rate of those eligible homeowners who are getting assistance is 25 percent.
The latest criticism of the program was made public this week by the State Foreclosure Prevention Working Group, made up of 12 state attorneys general and three banking regulators. The group said the total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow. Only four out of ten desperate borrowers are involved in loss mitigation efforts, it said in its first status report on the foreclosure crisis in a year.
“It is clear that these efforts must be improved and servicers have not succeeded in turning the corner to reduce the high levels of foreclosures,” the group’s report said. “…if homeowners fall out of the HAMP program in large numbers, the numbers of foreclosures closed will jump significantly.”
The group echoed criticism aimed at HAMP from economists and mortgage industry experts. Despite the growing number of loans that are “underwater” – where the homeowner owes more than the property is worth – less than 10 percent of loan modifications involve reducing the unpaid balance by more than 10 percent.
“Loss mitigation programs must be improved to prioritize principal reduction in areas of significant home price declines,” the group recommended.

One thought on “Can Treasury Fix Its Foreclosure Rescue Program?

  • January 25, 2010 at 6:08 am
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    Why do so many articles seem to think that writing down mortgage balances costs the bank some prohibitive amount of money for the lender, when it’s certainly less than the cost of foreclosure, which is the alternative.
    We’re still, as a nation, caught up in the politics of moral hazzard. Banks don’t “grant” principal reductions, the market has granted the principal reduction. The only question to the lender is who to give it to… Either the new borrower, or the current occupant. Either way the bank has to write the loan down.

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