How Much Does It Cost the Government to Prevent a Foreclosure?
This morning, the Congressional Oversight Panel for the TARP bank bailout held a hearing on the government's foreclosure prevention effort. In particular, the Making Home Affordable Program (HAMP) was in the spotlight. Thus far, it has had lackluster results, to be kind. Yet one witness, Treasury's Chief of the Homeownership Preservation Office Phyllis Caldwell, revealed a very interesting kernel of information. She said that the expected cost of the program is $29 billion. That's far less than the $75 billion allocated. It also allows us to estimate how much a successful mortgage modification actually costs. So let's crunch some numbers!
Thus far, the Treasury has started 495,898 permanent mortgage modifications. Its success rate at converting trials to permanent modifications is so far around 41%. To be conservative, let's say that going forward it does a little better, and that 50% will be successful.
So to those permanent modifications, let's add 86,796, which accounts for half of the active trial modifications that are still in the HAMP pipeline. At this point, it looks like the programs new trial modification growth is steady at around 25,000 or less per month. Again, half of that means 12,500 more permanent modifications per month. Conservatively, let's imagine the program rolls on for two more years, providing another 300,000 permanent modifications. That gives us a grand total of 882,694.
But we're not done. Many of these will re-default. So far, HAMP's re-default rate is actually pretty good. Just 25% of loans at least 12 months old are 60 or more days delinquent. But as time wears on, this percentage will increase. Many of these borrowers still have a significant debt burden, and the structure of HAMP modifications results in interest rates (and consequently payments) resetting higher each year for the first five years. So, very conservatively, let's say the re-default rate for HAMP ends up being 40%. That would be an incredible home-run re-default rate for the program, considering most mortgage modifications re-default at rates between 60% and 75%.
A 40% re-default rate would result in 529,616 successful mortgage modifications ultimately. Of course, that's well short of the three to four million foreclosures the program hoped to prevent. But considering the program's price tag, how much does each successful modification cost under this scenario?
Some simple division reveals an average cost of $54,757 per successful permanent modification. Whether that's money well spent depends on your perspective. If you're one of those half million or so struggling borrowers, then you probably think so. If you're part of one of the other 130 million or so other households in the U.S., however, then you might not be as convinced.