Private Mortgage Modifications Overshadow Government Program

If you follow the struggles of the government's "HAMP" foreclosure prevention effort, then you might think modifying mortgages is a lost cause. Last month, five times as many homeowners dropped out of HAMP than obtained permanent modifications. Its numbers of new trials and permanent modifications both declined in May. But there might be a reason why it's doing so badly: more attractive private servicer modification programs are crowding out the need for government assistance.

The House Committee for Oversight and Government Reform held another hearing on HAMP on Thursday. Representatives from five major mortgage servicers testified. In one part of the hearing, Rep. Jim Jordan (R-OH) asked what portion of their total mortgage modifications were permanent HAMP modifications (see bottom of post for video clip). The results weren't pretty:

As you can see, the vast majority of the time borrowers are choosing private modification programs over HAMP. Jordan followed up, asking whether there were many borrowers who qualified for HAMP but would not their program. All panelists said that this was a rare situation. In fact, some indicated that they often successfully modify mortgages for borrowers who didn't even qualify for HAMP. Here are a few choice responses.

Sanjiv Das, Chief Executive Officer, CitiMortgage, Inc.:

"Let's put it this way, for the people who fell out of HAMP, we were able to save about 15% more."

Michael J. Heid, Co-President, Wells Fargo Home Mortgage:

"Somewhere between 70 and 80 percent of the HAMP cancellations are resulting in some other form of saving the home or avoiding foreclosure."

Jordan drew the conclusion that HAMP was probably unnecessary to begin with. If almost all of the strikingly few borrowers that the program has helped would have qualified for private modifications anyway, what was the point? That doesn't sound like $75 billion well-spent.

While that line of reasoning is appears sensible, there is another side to the argument. The government's insistence on mortgage modification and creation of HAMP might have driven private programs to succeed as well. Once these servicers realized they would be forced to participate in HAMP, due to their acceptance of bailout money, they devised their own proprietary modification programs instead. In this case, it's possible that HAMP's existence helped to create the private mortgage modification market.

Even if it did, however, $75 billion is a pretty big price tag for nudging along a private sector that may have ended up in the same place anyway. The statistics above don't speak very favorably about HAMP's design either. The government program provides carrots to servicers, investors, and borrowers for their participation, but still produces far worse results than private programs without any such incentives.