Obama Administration's Homeowner Assistance Program Remains A Mess

There was no need to thoroughly screw up the real estate markets with a foreclosure assistance program, which only serves to spread out the pain and delay the inevitable economic recovery within the real estate markets by propping up people who had no business owning real estate in the first place.

Yet, that's where we are - a federal program to modify homeowner mortgages, and it's failing to stop foreclosures and the 2.8 million foreclosures last year may get topped this year as RealtyTrac estimates 3.5 million foreclosures. The Administration's goal of assisting those who are facing foreclosure is failing miserably.

Ten months into the government’s third program in two years to stop a record wave of foreclosures, homeowners, housing counselors, consumer advocates and attorneys working with borrowers report that the latest effort is falling far short of its goal. In many cases, lenders are moving to foreclose even after homeowners get approved for loan modification, housing counselors and attorneys say.

The problem, they say, goes beyond the paperwork snafus and staffing shortages at lenders and mortgage servicers that have created massive bottlenecks for the millions at risk of losing their homes. Those have plagued the government’s foreclosure relief efforts since the first government-industry joint program, the Hope Now Alliance, was launched in October 2007.
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Homeowners face numerous hurdles trying to get their mortgage modified. In some cases, applications are rejected with little or no explanation. It’s impossible to independently verify if a homeowner qualifies because the Treasury has not disclosed the eligibility formula used by lenders — a complex set of calculations that housing counselors and consumer attorneys have dubbed “the black box.” Housing attorneys report that some lenders are ignoring the program’s guidelines altogether and moving to foreclose without properly reviewing mortgages for possible modification.

“It’s been a stubborn challenge," said a Treasury official, who agreed to an interview but requested anonymity. "But this is something that’s never been done before."

It's never been done before because there was never a need to do so, and there was no need to do so in this case. Foreclosures are at one end of a spectrum of transactions involving real estate and provide the starkest correction in pricing; each foreclosure results in driving down the price of real estate making it more affordable to those who can afford to borrow.

The reason we're in the mess we're in is all too many people were able to borrow without sufficient revenues to afford their purchases over the long term.

So, what's involved in the homeowner assistance program?

Frustrated by the lack of progress with loan modifications, some homeowners are giving up and choosing “strategic default” — simply walking away from their homes. Those defaults, and the ongoing wave of foreclosures, will continue to weigh on the housing market, holding back the nascent economic recovery.

Saving a home from foreclosure can be as simple as rewriting a costly, high-rate subprime loan to prevailing mortgage market rates. If that doesn’t bring the payment to within roughly 31 percent of a homeowners’ monthly income, HAMP guidelines require mortgage servicers to follow a step-by-step process to cut mortgage payments further. First, they can write down the interest rate to as low as 2 percent and then stretch the term of the loan to 40 years. If that doesn’t work, lenders can cut the amount of principal owed.

But cutting principal is entirely voluntary, and most lenders aren’t doing so, housing counselors and attorneys say.

The reason that a person was in a subprime mortgage in the first place was because they were ill advised to be purchasing a home. Reducing the interest rate is something that could have been done without HAMP (it's called refinancing a home), but with real estate prices dropping and the appraisals finding more and more homes underwater, they wouldn't issue new loans where the loan to book value exceeded the value of the properties.

Reducing the mortgage payments to 31% of the monthly income sounds great, but that's what the typical guidelines for those buying a home were all along. If you were in the market for a home, you were advised by the experts not to spend more than 31% of net income or 39% of gross income. Banks were supposed to keep that in mind as well.

Stretching mortgages out to 40 years likewise sounds great, except that no one expects to truly hold on to a home for 40 years; it would move far sooner than that as the average homeowner buys and sells ever 7-8 years.

Cutting principal isn't going to happen, even though that would be tied directly to the appraised value of the property. It would allow a bank to lend to someone even though the appraisal would show that the homeowner is underwater. This would slowly adjust real estate prices in the locality. A short sale would accomplish the same thing, particularly if the bank eats the difference and would enable those with the ability to afford these homes to buy them at a more reasonable price.