HAMP is a failure: Here's why

This post comes from Marilyn Lewis of MSN Money.

The federal program for modifying home loans just can't seem to get it right.

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But banks suddenly are ramping up their numbers of modifications. After years of inaction, banks are now where the modification action is.

Government's record

The two-year-old Home Affordable Modification Program has made just slightly more than a half million mortgage modifications. When it was launched, President Obama aimed it to help 3 million to 4 million homeowners. (See eligibility and contact information for HAMP.)

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HAMP's failure was pointed out by the special inspector general for the Troubled Asset Relief Program, who said that "despite frequent retooling, (it) continues to fall dramatically short of any meaningful standard of success," Housing Wire reports.

The cost: Taxpayers paid $12 billion ($50 billion was allocated) in payouts to servicers and homeowners for roughly 530,000 modifications.

We do the math: That's $22,600 apiece. Post continues after video.

Banks' record

For banks, HAMP is voluntary. Many complain that the requirements are too strict. They can do their own modifications.

A new report by Hope Now, a coalition of lenders, says it made 1.24 million permanent loan modifications for homeowners last year. These were done in-house, not as part of HAMP. (See eligibility and contact information for Hope Now.)

HAMP expires at the end of 2012. At best, experts are expecting it will have done 800,000 modifications.

Newly empowered congressional Republicans want it ended now. They want to "unwind many of the administration's efforts to fix the mortgage markets" with a series of bills, including one introduced last week to kill HAMP, says Housing Wire. (GOP sponsors also want to repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act (.pdf file) and stop funding for the Department of Housing and Urban Development.)

Not all modifications are equal

Despite the sudden conversion by banks, be careful drawing conclusions. Modifications are not all created equal.

Many homeowners who get their loans modified default again. HAMP, while slow off the mark, makes more modifications stick, reports The Wall Street Journal.

"Loans modified under HAMP generally perform better because borrowers receive much more generous relief," the Journal writes. "HAMP modifications reduced monthly payments by $608 during the second quarter, compared with an average $307 reduction for other modifications."

This may be why banks don't want to use HAMP: They don't want to give homeowners the required concessions.

It also explains why bank-made modifications are likely to re-default: Without sufficient relief, homeowners still can't make the payments on modified loans.

Just last week, ProPublica, the nonprofit, independent reporting organization, released the results of its investigation into the HAMP failure.

The title: "Govt's loan mod program crippled by lax oversight and deference to banks."

The conclusion: The administration's eagerness to cooperate with banks, rather than to enforce its program, doomed it. The Treasury Department threatened banks to get them to make meaningful modifications, but it never followed through to correct lender errors, foot-dragging, wrongful denials. For example:

Auditors also found 15 of the largest 20 participating servicers were incorrectly using the Treasury formula that determines if homeowners qualify for the program.

But Treasury has been unwilling to offend the banks with penalties, ProPublica says.

The article inspired 145 responses from readers. "AdriAnne" wrote:

How much longer can the banks get away with this? I have seen people go to prison for stealing a pack of cigarettes yet the bank can steal people's homes and it is okay?? When will the Government step in and place a freeze on these foreclosures and make them fix this …!

"Pat" wrote:

I work at a HUD approved housing counseling agency. In Orange County, CA we no longer let the servicers get away with refusing loan modifications. We advise our homeowners who were wrongly denied a loan modification to file a lawsuit.

What got lenders moving?

But, back to the question of the banks' new eagerness to offer modifications: What got lenders moving after years of foot-dragging?

Three things seem to be behind it:

• Lenders are feeling the expense of foreclosures; they want faster, cheaper ways of resolving homeowner defaults.
• State attorneys general are breathing down the necks of banks, trying to force them to do more modifications.
• Some courts are no longer rubber-stamping banks' foreclosure actions. Some are ordering mediation and listening to consumer arguments.

The state AGs have become a powerful consumer-advocate force.

For example, California Attorney General (now governor) Jerry Brown got Wells Fargo to agree in December "to provide loan modifications worth more than $2 billion to thousands of California homeowners with 'pick-a-pay' loans and to pay an additional $32 million to thousands of borrowers who lost their homes through foreclosure."

Says The Wall Street Journal, in another article:

About 20 states encourage some type of foreclosure mediation program to allow borrowers and lenders to hammer out a settlement, according to the Center for American Progress, a liberal Washington think tank. Three of those states -- New York, Florida and Connecticut -- and a handful of cities make mediation mandatory.

"... dismissing cases and ordering mediation, those are just two tools that state judges have," mortgage expert Alan M. White, law professor at Valparaiso University in Indiana, tells the Journal.

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