Earlier, I wrote about Special Inspector General of TARP Neil Barofsky's audit findings on the Treasury's foreclosure prevention program (HAMP). He concluded that it wasn't working out very well. In a hearing today, Assistant Secretary for Financial Stability Herbert M. Allison, testified about changes to the program the Treasury hopes will make it more effective. A few may help a bit, but big problems are still looming.
These changes are part of something called Supplemental Directive 10-02, which as far as I can tell, isn't online yet.* But Allison did summarize the principles behind its four main parts at the hearing.
Forced, Early Consideration
First, servicers must proactively determine whether borrowers are eligible for HAMP as soon as two payments have been missed. Then, they must actively solicit the borrowers to seek their participation in the program. This is a departure from when the onus was generally on borrowers to request participation in the program.
No Foreclosure Referrals
So the borrower's eligibility has been evaluated -- what happens next? According to Allison's testimony:
The guidance would prohibit foreclosure referral for all potentially eligible loans unless the borrower does not respond to solicitation, was not approved for HAMP, or failed to make their trial modification payments. Servicers must also certify to their foreclosure attorneys that a borrower is not eligible for HAMP before a sale may be conducted.
That's a significant change. The broader explanation is that all servicers participating in HAMP must ensure that a delinquent borrower is ineligible for or uninterested in the program prior to starting foreclosure.
A borrower is determined to be eligible; now what? Allison explains:
Servicers will be required to provide borrowers with clear written communications explaining the concurrent foreclosure/modification processes and stating that a foreclosure sale will not take place during the trial period. If a borrower is found ineligible for HAMP, a foreclosure sale cannot be scheduled sooner than 30 days after the date of a Non-Approval Notice so that the borrower has a chance to respond.
That 30-day period matters because it gives the applicant more time to respond and potentially fix inaccuracies or correct technicalities. Obviously, if a borrower simply didn't qualify, then more time wouldn't change things.
Finally, the Treasury intends to push other programs to prevent foreclosure. One of those includes a relatively young program that encourages banks to modify second liens. I've written about this problem in the past, noting that a second lien often holds up modification. Another program would encourage short sales. I've written about this one too. Even though a short sale would still force the borrower out of their home, it's generally preferable to foreclosure.
Will the Changes Help?
I see almost all of these new rules hinging on one very problematic issue: enforcement. As I understand it, HAMP is voluntarily to any banks that paid back their bailout money. Those big banks own or service most of the mortgages in question. So what power does the Treasury have to compel banks to follow these rules? They would be subject to financial penalties.
But, as I understand it, the banks would still have the option of simply opting out of the program. Then, they would just have their own mortgage modification programs to work with, and could play by their own rules instead. The Treasury probably believes that banks won't do this, but if the problem here is that banks and servicers are really at fault for purposely not offering more modifications, then wouldn't they consider exiting the program to avoid that very outcome?**
If the banks do agree to these new rules will they help? The first three could, but I'm a little unconvinced that there are that many people out there who would qualify for modifications that aren't already attempting to utilize the program and fighting to bring trial modifications permanent. So they might produce more modifications, but I don't think the result will be drastic, especially if servicers find the rules too extreme and begin pulling out of the program.
As for the alternatives, those are probably the most promising. It's too early to tell how successful the second lien program will be. But if it works, then it could help. In my prior post I discussed some of the strange consequences of the short sale concept. I'm not entirely convinced the carrot the program dangles above banks/servicers is big enough to induce many more short sales that wouldn't have happened anyway. But insofar as it encourages short sales as an alternative to foreclosure, I'm on board.
What's noticeably absent from these changes in HAMP? Any responses to SIGTARP's concerns about re-default mentioned in my earlier post. Borrowers may still be too deep in other debt to afford the modification, could fail to afford payments when they reset in five years and might ultimately decide to walk away if underwater. Principal reduction is the way to best deal with most of those problems, an option the Treasury is so far mostly resisting.
A Final Point of Interest: The Cost
One interesting piece of information that Allison offered was how much has been spent so far on the 168,708 modifications made permanent through February. They cost was $57 million. But those same modifications are estimated to cost an additional $775 million over the next several years. That amounts to $338 per loan initially and $4,932 per loan ultimately.
I find this confusing, because the program is meant to spend $50 billion and help three to four million homeowners. That would imply that the Treasury should be spending between $12,500 and $16,667 per loan. They're only at a fraction of that.
I don't mean to imply that lower cost for permanent modifications is bad news. But perhaps if the Treasury offered more money to secure greater principal reduction, for example, banks would be more willing to make modifications. $5,000 to $10,000 could go a long way in convincing banks to forgive more principal, and the program would remain within budget.
* Treasury sent it to me, so here it is.
** Got a response from Treasury. They tell me that once a servicer signs the contract for the program, they must adhere to all guidelines. I'm still a little unclear if that means they must stay in the program. It seems kind of strange that a program could change rules regularly, yet require a servicer to stay in it because of the initial contract. But it sounds like they don't worry about servicer participation.