"Treasury's reluctance to acknowledge HAMP's shortcomings has had real consequences," the bailout watchdog declared in its report. An "untold number of borrowers may go without help -- all because Treasury failed to acknowledge HAMP's shortcomings in time."
Housing experts have declared that the administration's botched program leaves the broader housing market and the economy susceptible to more shocks ahead, as foreclosed homes pile up, pulling down real estate values.
"Having dragged their feet through various revisions to the program, and with their ability to now redesign it shut down, they have ensured HAMP its place in the trash bin of history," said noted bond analyst Joshua Rosner, a managing director at Graham Fisher & Co. who analyzes housing.
The abundance of data in the oversight panel's report presents a picture of a flimsy government program that has been swamped by an unceasing flood of homeowners landing in trouble and houses sinking into foreclosure. Since the program began, nine new foreclosures have been initiated for every permanent loan modification that has been approved, the panel found.
Under the program, troubled homeowners who qualify are enrolled for three-month trial periods during which they make lower monthly payments. So long as they make their payments on time and document their distressed situation, borrowers are supposed to be automatically rolled into so-called permanent modification plan in which their monthly payments stay relatively flat for five years.
Some homeowners have been stuck in the trial phase for as long as 20 months, according to the Congressional Oversight Panel. The chairman of the panel, former Delaware Senator Ted Kaufman, called that "egregious," during Monday evening's call with reporters. He singled out for criticism the giant banks that collect mortgage payments--servicers, in industry parlance. He also blamed Treasury for failing to hold the mortgage companies to account.
"There is extensive anecdotal evidence servicers aren't living up to the rules," said Kaufman, a Democrat. "Treasury is not nearly being as forceful as they can."
The panel asserted that Treasury can levy penalties on mortgage companies for failing to abide by the program's rules. Treasury insists that it lacks such authority, though it clearly has the power to claw back the incentive payments it makes to servicers for enrolling homeowners in five-year modification plans. Despite heavy criticism from Congress, Treasury has withheld no payments. Treasury is now considering withholding payments for 132 modified loans, the panel's report notes.
Even those homeowners who have successfully navigated the Kafkaesque bureaucracy required to secure a loan modification have rarely received significant relief. Nearly 95 percent of such homeowners have ended up with higher principal balances after receiving a modification, according to the report. More than 76 percent of homeowners in the program owe more on their mortgage than the home is worth, a situation referred to as being "underwater."
About 10.8 million, or 22.5 percent, of all homeowners with a mortgage were underwater as of Sept. 30, according to CoreLogic, a data provider.
A range of housing experts have long argued that the foreclosure crisis can only be stemmed by a more aggressive program that shrinks the outstanding balances on mortgages. The Treasury and the financial industry has long resisted such calls on the grounds that it would cost someone money--either the banks or taxpayers.
Writing down principal balances on mortgages would give people whose are worth less than they owe greater incentive to stay current on their payments, say experts.
"Negative equity is a primary factor holding back the housing market and broader economy," Mark Fleming, CoreLogic's chief economist, said in a Monday statement.
According to the oversight panel's report, homeowners are falling further underwater after their loans are modified under Obama's plan. After their loan is restructured, the typical HAMP homeowner owes $1.25 on their mortgage for every $1.00 their home is worth.
The oversight panel zeroed in on the problem of underwater borrowers as a key challenge for the economy. With so many people underwater, many homeowners who would like to sell their properties and move to parts of the country with more abundant jobs are stuck in place. Some borrowers have opted to simply forego making payments and relinquish their homes to foreclosure.
"Negative equity can restrict the ability of homeowners to move, whether for family reasons or to pursue greater job opportunities, since home sale proceeds will not be sufficient to repay their loan," the report states. "It also provides an incentive for borrowers who can afford to pay their mortgages to stop paying intentionally and walk away."
This dynamic seems likely to worsen before it gets better, with many analysts anticipating that housing prices will continue to fall in much of the country through the end of next year. Housing prices have fallen by 30 percent nationwide since early 2006, according to the S&P/Case-Shiller Home Price Index.
Massad, the Treasury official overseeing the rescue program, said the department grasps that underwater borrowers are playing a significant role in exacerbating the foreclosure crisis. He emphasized that Treasury recently launched additional programs aimed at shrinking balances for people whose homes are worth less than they owe the bank.
But despite these programs, mortgage companies have reduced the principal for only three percent of the homeowners in the HAMP program, according to the the panel's report.
"Clearly, it's a big, big problem," said Kaufman.
Rosner and other experts assert that Treasury should force lenders to write down second mortgages, such as home equity lines of credit--a popular way in which homeowners turned increased real estate values into the cash during the boom. And if writing down those loans still leaves borrowers unable to make their monthly payments, primary mortgages should be written down, he added.
But that approach has been emphatically rejected by Treasury and the large banks, who are themselves on the hook for many second mortgages. While the largest four American banks generally sold off primary mortgages to investors and now merely collect fees for handling the bills, these same four banks themselves hold 43 percent of second mortgages--an amount reaching $420 billion, according to the panel.
That, say analysts, largely explains the dismal state of the administration's foreclosure program and Treasury's unwillingness to champion the only clear remedy: writing down principal balances. Indeed, the oversight panel concludes that forcing lenders to absorb losses on second mortgages could leave the four biggest banks severely crippled.
"Treasury's HAMP program has, in policy and practice, been a colossal failure," Rosner wrote in an e-mail. "Rather than working in the interests of borrowers and investors, whose interests are fundamentally aligned, HAMP appears to have been designed to shield banks and their captive servicers from the negative financial impact that a reasonable resolution to the crisis would require."
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Shahien Nasiripour is the business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.
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The new sheriff in town is not at all blase about the foreclosure fraud crisis.
The latest disclosures are deeply troubling, but they should not come as a big surprise. For years, both individual homeowners and consumer advocates sounded alarms that foreclosure processes were riddled with problems.
While federal and state investigators are still examining exactly what has gone wrong and why, two things are clear.
First, several financial services companies have already admitted that they used “robo-signers,” false declarations, and other workarounds to cut corners, creating a legal nightmare that will waste time and money that could have been better spent to help this economy recover. Mortgage lenders will spend millions of dollars retracing their steps, often with the same result that families who cannot pay will lose their homes.
Second, this mess might well have been avoided if the Consumer Financial Protection Bureau had been in place just a few years ago....
Lost in much of the back-and-forth over wrongful foreclosures is the question of whether the scandal could have been prevented. The answer is yes.
The practices now under investigation took root and grew because there was no single federal regulator with both the responsibility and the tools to look out for consumers.
Had it existed, the new consumer agency could have stopped these problems before they multiplied. Many of the failures already admitted were not sophisticated scams that had been carefully concealed. By enforcing existing laws and involving state authorities early on, the agency could have made sure that the law was respected. No one would need to wonder whether the world of borrowing and lending works only one way: Families have to follow the legal rules, but the rules are optional for big banks....
A mortgage is the biggest financial commitment most Americans will make in a lifetime, and the toll on Florida has been especially heavy and the need for oversight particularly apparent. A few weeks ago, I watched proceedings in a Fort Lauderdale foreclosure court and saw firsthand the painful outcomes for numerous families.
Unfair servicing practices can worsen a family’s already difficult economic situation, and the injury echoes from the family to the community and ultimately throughout the economy. Cops on the beat can stop problems before the damage spreads. If there ever was any doubt that the new consumer agency is necessary, the latest foreclosure developments should put that to rest.
Hopefully, Warren's voice will be heard within the administration not just in preventing future foreclosure fraud crises, but in dealing with this one, and she can counter Geithner's unwillingness to intervene against the banks. It's about time there was a very strong voice in Treasury speaking out on behalf of the borrowers.
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