Will Treasury's Changes to HAMP Help?

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.

Timeframe

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.

Alternative Programs

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?**

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.

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