A congressional oversight committee yesterday questioned whether the limited scope and scale of the Administration’s Making Home Affordable program (HAMP) will be capable of stemming the ever-increasing flood of foreclosures that is washing away equity from the nation’s housing markets and crippling efforts at economic recovery
One in eight mortgages is currently in foreclosure or default, and current forecasts predict 10 to 12 million more foreclosures are in store. Yet the joint Treasury-HUD program, which launched in March, is still in the early stages of implementation, concluded the Congressional Oversight Panel created to oversee the expenditure of the Troubled Asset Relief Program (TARP).
“It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now,” the report said. The program is limited to certain mortgage configurations. Many of the coming foreclosures are likely to be payment option adjustable rate mortgage and interest-only loan resets, many of which exceed HAMP eligibility limits. Treasury’s strategy also makes no provision for foreclosures due to unemployment, which now appear to be one of the biggest drivers of foreclosure.
Foreclosures continue every day as Treasury ramps up the program, with foreclosure starts outpacing new HAMP trial modifications at a rate of more than two to one. Even once the program is fully operational, Treasury’s own projections indicate, in the best case, fewer than half of the predicted foreclosures would be avoided, it said.
“The result for many homeowners could be that foreclosure is delayed, not avoided.” HAMP modifications are often not permanent: For many homeowners, payments will rise after five years, and although the program is still in its early stages, only a very small proportion of trial modifications have converted into longer term modifications,” it said.
The Panel is also concerned about homeowners who face negative equity or are “underwater” - that is, the value of the loan exceeds the value of their home. For many borrowers, HAMP modifications increase negative equity, a factor that appears to be associated with increased rates of re-default.
The $75 billion foreclosure program was created to help seven to nine million families keep their homes by the end of 2012, by lowering their monthly payments to a level they can afford either by refinancing their mortgage if it is he/d by Fannie Mae or Freddie Mac or by modifying the terms of their loans.
Yesterday the Treasury Department reported it had reached the goal of 500,000 trial loan modifications nearly a month ahead of the November 1 deadline it had set for the program in July to push servicers to ramp up program implementation and sustain a faster pace of modifications; trial modifications are now being issued at a faster rate than new homeowners are becoming eligible. As part of a continued effort to improve program performance, senior Treasury and HUD officials held the next in a series of meetings with servicers yesterday afternoon, with discussion focused on improving servicer efficiency and responsiveness to borrowers during the modification process.
Yet at the current rate of foreclosure filings reported by RealtyTrac,12 million total new foreclosures are expected through 2012, 30 percent more than the most optimistic number of homeowners targeted by the government’s efforts.
Additionally, two recent reports on two forms of exotic loans expect resets of two types of exotic loans to create $235 to $311 billion worth of new foreclosures over the next three years (see Waves of Resets Promise a New Foreclosure Flood). These reset-caused foreclosures will add to the current foreclosure rate and significantly increase the level of defaults we are now experiencing.
Finally, prime fixed rate loans, not exotic loans, now account for one third of all delinquencies. These are undoubtedly largely caused by unemployment. The percentage of delinquencies attributable to unemployment has been growing rapidly during the year. Absent an improvement in the overall economic picture, a reduction of layoffs and creation of new jobs, unemployment will continue to drive families into default.
The Congressional Oversight Panel was created to oversee the expenditure of the Troubled Asset Relief Program (TARP) funds authorized by Congress in the Emergency Economic Stabilization Act of 2008 (EESA) and to provide recommendations on regulatory reform. The Panel members are: former Securities and Exchange Commissioner Paul S. Atkins, Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York, Damon Silvers, Associate General Counsel of the AFL-CIO and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School.