Last summer, House Republicans were calling for the Obama administration to scrap its foreclosure prevention programs. At that time, they had a minority; now, they've got a majority. Their view on the programs hasn't changed, so next week they plan to introduce legislation to kill the mortgage modification efforts and save the government some money. Should they be axed?
To evaluate these programs, we should consider the impact they have, their cost, and their potential savings. There are actually four programs on the chopping block, so let's go through each one separately:
Making Homes Affordable Program (HAMP)
Here, Republicans hope to save around $28 billion that is thus unspent of the $29 billion allocated. Thus far, the program has been a pretty big disappointment. Instead of helping a few million Americans, it only has about 520,000 active permanent mortgage modifications. There's little doubt that a significant portion will re-default. Moreover, its new production has sunk to below 30,000 trial modifications per month.
Back in October, I estimated that at its current rate of production, assuming moderate re-defaults, HAMP should ultimately prevent around 530,000 foreclosures. The cost, if it spends all of its money allocated on those modifications, would be a little over $50,000 per modification. That's pretty expensive.
Next month, we may learn if its additional effort for reducing principal has made much progress. Unless it has dramatically reshaped the program's path, however, the program's results going forward are likely to be very weak. So considering how few additional, new modifications the program is likely to make and the potential $28 billion savings, this one does seem ripe for Republicans to cut.
Neighborhood Stabilization Program
This program is much, much smaller than HAMP. Its cost was around $7 billion, and only about $1 billion of that is unspent. The purpose of this program has been to target localities severely struck by the housing market collapse. It does so by providing funding for local governments to purchase and rehabilitate foreclosed properties. Funding is then also used to subsidize the purchase of that home by a low- to moderate-income homeowner.
Due to its small size, the NSP simply can't have a huge reach, but it is targeted at the worst-hit regions, which also tend to be those plagued by very high unemployment due to their over-reliance on the housing market. Moreover, the savings here at $1 billion would be relatively minimal. So whether or not to cut this program is a toss-up. It's better designed to target areas that really need help, but not in such a way that it would prolong housing market trouble since it does not actually prevent foreclosures, just cuts housing inventory. Its price tag is also relatively low.
FHA Refinance Program
This is another program that hasn't really caught on. It's meant to help underwater homeowners refinance their homes with an FHA loan to lower their monthly payments and principal. According to the House Financial Services Committee press release:
The price tag for this program is $8.12 billion, of which only $50 million has been disbursed thus far. For this large outlay, the taxpayers have seen minimal return on their investment. As of December 13, 2010, only 35 applications had been submitted for this program.
It's hard to see when the stars would align to allow this program to work. First, borrowers must be current on their underwater mortgage. Then, their lender must agree to write off at least 10% of the balance of their mortgage as a part of the refinancing process. It's hard to imagine many banks willing to take a loss on a loan that is current. Even if this program has potential to help, how can it succeed against the long odds it faces? Cutting it and saving that $8 billion sounds like a good idea.
Emergency Mortgage Relief Program
This program (considered and explained in detail here) provides assistance to Americans who have had their income temporarily disrupted, presumably by unemployment. It works by providing a loan to homeowners who use it to continue to make mortgage payments until their income returns, for up to two years.
The program is well-intentioned, but it raises some questions. First, isn't unemployment insurance already supposed to provide income to cover daily expenses like this? Second, if a person is unemployed for an extended period -- like so many Americans are these days -- this loan won't be enough to prevent foreclosure. In these cases, it would just prolong the time to foreclosure, not actually prevent it.
With all that said, the program's cost is only $1 billion, which isn't much in federal budget math. And if it manages to prevent many foreclosures for Americans unemployed for a relatively short period, then it might be worth the cost. The problem is we're not sure if it's working. To save this program, the administration needs to provide some hard data on the good it's doing so that its benefits can be weighted against its costs.
So where does that leave us? Even if just HAMP and the FHA program are cut, that would result in about $36 billion in savings. And if you left the Neighborhood Stabilization and Emergency Mortgage Relief Programs intact, it would only cost $2 billion. So really, it seems like the question here boils down to whether just HAMP and the FHA refinance program should be cut or if all four have weak benefits that don't exceed their costs.
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