Government Initiative Fails to Address Growing Mortgage Crisis

According to the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), a watchdog group for American taxpayers, the U.S. Treasury’s recent attempt to facilitate a recovery for the mortgage crisis has failed at an “alarming rate.”

The Home Affordable Modification Program (HAMP), initiated in 2009, had aspirations of helping approximately three to four million borrowers avoid foreclosure. However, HAMP has failed to provide permanent modifications for approximately one-third of their target population. Default rates on the approximately one million borrowers that have received assistance remain high, suggesting the program has suffered setbacks.

A SIGTARP Executive Summary, for the first quarter of 2013, acknowledged growing concern “that the number of homeowners re-defaulting on HAMP permanent mortgage modifications is increasing at an alarming rate. SIGTARP recommended that Treasury research and analyze the cause of these re-defaults, and take preventative action to reduce them so that HAMP modifications are sustainable.”

A review of Treasury data suggests that the longer a homeowner remains in the HAMP program, the more likely they are to become part of the mortgage crisis. As of this year, HAMP’s first attempts at modification, from the third and fourth quarter of 2009, are re-defaulting at a disturbing rate of 46.1 percent and 39.1 percent respectively. Rates in 2010 demonstrate a similar trend, ranging from 28.9 percent to 37.6 percent.

Michael Barr, one of the architects of HAMP, is not surprised by the statistics. “The re-default rates are still below current industry averages, and below the conservative case we used in program design, which was the then-existing rate of 50 percent,” said Barr.

Complications have impeded the progression of HAMP since its conception in 2009. Principal reductions have only been seen in 82,813 of the owners receiving modifications under the government program. In 2012, bank representatives eluded that back end debt-to-income (DTI) ratios for HAMP modifications were too high, contributing to the re-default rate. Borrowers were paying too much of their income on debt, leading to the current mortgage crisis..

Mortgage analyst Mark Hanson acknowledged, “A 64.3 percent DTI is so far out of scope with the pre-bubble years safe-and-sound 36 percent total DTI — and even typical bubble-years full-doc DTI’s of 50 percent — it is absolutely irresponsible. Servicers are pushing the envelope with respect to getting people to qualify.” Confirming his 2012 suspicions, Hanson is not surprised at the rate of failure HAMP has demonstrated. “Because if you look at them structurally — sky-high DTI, LTV [loan to value] and low credit score — they make legacy Subprime loans look sane.”

There are currently 862,000 homeowners that have received permanent HAMP modifications because of the mortgage crisis; 312,000 of which have already defaulted. Upcoming years are predicted to increase interest rates for HAMP modifications, resulting in even more defaults.

By comparison, banks have implemented their own variations of mortgage modification to ease the credit process. Banks providing loan modifications have served to remove more mortgage principal, a strategy that has witnessed far better results than the HAMP program. According to the Office of Comptroller of the Currency, bank loan modifications have increased property fixes by 55 percent. Meanwhile, HAMP modifications are down 31 percent for the same period.

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