President Obama forecast many Americans’ desperation, which continues to drag down economic recovery. His attempted solutions, however, have not worked. Federal spending and a multitude of government programs have been created to tinker with the problem. But unsuccessfully. A record 2.9 million properties in the U.S. received foreclosure notices in 2010, according to a Jan. 13 Barron’s story quoting RealyTrac. Homes continue to lose value. At least 9 million households now are affected.
“In the end, all of us are paying a price for this home mortgage crisis,” President Obama said back in February 2009. “And all of us will pay an even steeper price if we allow this crisis to continue to deepen—a crisis which is unraveling home ownership, the middle class and the American dream itself,” he added. His major solution: another failing federal spending program.
With so many owing mortgages larger than their homes are worth, many of them struggling in a jobless society, President Obama rode to the rescue with the standard administration solution: $75 billion and a multitude of bureaucracies. He unveiled his aggressive plan to try to help up to 9 million homeowners avoid foreclosure. But like so many inflated promises of this administration, the air has gone out of that balloon, too. Instead of 9 million homeowners saved, the program has helped only about 650,000 since taking effect last March, according to CoreLogic, an organization that tracks housing trends.
Who else is counting? The Congressional Oversight Panel (COP) is. COP was created in October 2008 to “oversee Treasury Department actions, assess the impact of spending to help stabilize the economy, ensure effective foreclosure mitigation efforts, and evaluate market transparency.” Its job was to report on regulatory reform and the effectiveness of the financial system in protecting consumers.
The COP in a report last month blasted both the Treasury Department and loan services on the abysmal performance of Obama’s Home Affordable Modification Program (HAMP). The panel even had a dollop of blame left for Fannie Mae and Freddie Mac, the government-controlled mortgage lenders of ill repute, according to a Dec. 14 report from MortgageNewsDaily. In the COP’s previous report in April, the panel said it had serious concerns about the accountability, timelines, and sustainability of Treasury’s efforts.
The administration’s mortgage modification plan called for lenders to reduce monthly interest payments to 38 percent of the mortgage holder’s income. The government would then step in with money to help cut payments to 31 percent of the individual’s income. This 7-percentage point funding assistance would be in the form of a check paid to the bank.
The lender would get $1,000 for each modification and $1,000 each year for 3 years as long as the borrower continues to make payments. Meanwhile, borrowers could get $1,000 knocked off the principal of their loan each year for 5 years if they make payments on time. To determine if a mortgage will be modified, the lender has to perform a so-called net present value test. It compares expected cash flow the loan would generate if modified with expected cash flow if it isn’t modified. If more cash flow is expected, the lender is to restructure the loan. Sound a bit complicated?
The earlier report of the COP said that even when the program was operating, it would probably fail to reach most of the homeowners in trouble. It now appears as though HAMP’s target will be a far cry from preventing the 8 to 13 million foreclosures expected by the end of 2012. The backlog of trial modifications had fallen to about 70,000, mainly because of the decline in the number of people entering the new trial modifications. It may have been just too complex to figure out.
As if there weren’t enough bureaucracies to cover the entire face of the District of Columbia, the Treasury, to supplement HAMP, came out with “many other programs with incentives for banks,” the COP said. Including:
Home Price Decline Protection (HPDP), Principal Reduction Alternative (PRA), Home Affordable Unemployment Program (UP), Home Affordable Foreclosure Alternatives (HAFA), Second Lien Modification Program (2MP), Hardest Hit Fund (HHF), Emergency Homeowners Loan Program (EHLP), plus FHA’s Short Refinance Program.
HPDP, for instance, provides additional incentive payments for modifications on properties in areas where prices have recently declined. The Home Affordable Unemployment Program (UP) provides a mortgage forbearance period during which the mortgage would be reduced or eliminated.
Some banks, such as Citibank and Bank of America have their own mortgage assistance programs. Citibank, for example, “permanently modified 15,607 mortgages through February 2010,” the bank said. Modification is one of several programs it has for struggling homeowners.
The Emergency Homeowner Loan Program (EHLP), launched in August by the Department of Housing and Urban Development (HUD) had $1 billion to help unemployed homeowners prevent foreclosures. This combined with other bailout programs, such as the Home Affordable Refinance Program (HARP), represent a $3 billion expenditure. But HUD said “very few borrowers were able to qualify for HARP” that enabled homeowners, who had mortgages owned by Fannie Mae or Freddie Mac, to finance their under-water loans up to 125 percent loan to value. The mortgage relief “will be in the form of a deferred payment, also known as a bridge loan[.]” To be eligible, a household must have had an income before the event which caused the payment delinquency, equal to or less than 120 percent of “the area median income and a post-event decrease of income of at least 15 percent.” Now, who’s going to figure out all this red tape?
Determining who holds the actual mortgage and the enforcement of regulations are reasons that loan modification and foreclosure mediation programs aren’t saving people from losing their homes, said David Jones with Lied Institute for Real Estate Studies at University of Nevada in a Jan. 11 story in the Las Vegas News.
The housing market must bottom-out to begin recovery. To do so, financial institutions will have to proceed with foreclosures, repossess homes and move through the huge inventory backlog.
This will depend largely on market forces, not on the multitude of expensive government programs.
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