Mortgage Programs Target Many, Help Few

Fourteen and counting. That’s the number of federal loan modification programs currently in place, each one targeting financially stressed homeowners to help them stay current on their mortgage payments and avoid foreclosure.

Fourteen is also a rough estimate of the number of homeowners who have actually benefited from these programs. That’s obviously an exaggeration, but the point remains.

Since September 2008, when the collapse of the housing market caused a credit crisis that led to a worldwide financial panic, an estimated 3.5 million U.S. homes have completed the foreclosure process, according to real estate research firm CoreLogic.

The record number of foreclosures has rippled through the broader economy with devastating results.

In response to the flood of foreclosures, the government has introduced, updated and or modified a veritable alphabet soup of loan modification programs -- HAMP, PRA, HARP, HARP 2.0, HHF, etc… -- most of them aimed at coaxing lenders and mortgage servicers into reworking home loans at more favorable terms.

The reasons can be debated but the results cannot: the programs have been remarkably ineffective.

“The calls continue for even larger subsidies – there is no logical end until the payment is zero.”

- Edward Pinto, American Enterprise Institute.

Edward Pinto, a former executive with mortgage servicing giant Fannie Mae and now a resident fellow at the American Enterprise Institute, said the programs were fatally flawed from the get-go.

Because the loan modification programs were “political by design,” Pinto said they were doomed to fail in the same way earlier housing policies that dramatically eased lending standards in order to promote home ownership were also doomed.

Moreover, the programs were weighed down by the “sheer number of borrowers who could not afford their current homes even with the subsidies,” said Pinto.

Consider just one of those programs, the HHF, or the Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets, which came to be known as the Hardest Hit Fund.

The HHF was born in February 2010 because an earlier program, the Home Affordable Modification Program, which was carved out of the massive $700 billion Troubled Asset Relief Program, wasn’t reaching enough people.

HHF was initially supposed to spread $1.5 billion in TARP funds across five states hardest hit by foreclosures. Eventually, the program was expanded to 18 states and Washington, D.C., and the fund increased to $7.6 billion.

But guess what? A report released earlier this month by the Special Inspector General for TARP found that as of Dec. 31, 2011, the HHF had spent $217.4 million to help a total of 30,640 homeowners. Those figures represent just 3% of the money allocated to HHF and 7% of the homeowners targeted by the program.

“After two years, the Hardest Hit Fund has experienced significant delay in providing help to homeowners due to several factors including a lack of comprehensive planning by Treasury and a delay and limitation in participation in the program by large servicers and the Government-sponsored enterprises (Fannie Mae and Freddie Mac),” the report explained.

In other words, the major lenders and mortgage servicers (Fannie Mae and Freddie Mac back about 70% of all U.S. home loans) weren’t cooperating.

In Florida, a state wracked by foreclosures, the program was supposed to reach 40,000 struggling homeowners but has reached only 3,400, according to the SIGTARP report.

Anthony Sanders, a professor of real estate finance at George Mason University, said the first mistake made by the Obama administration was a decision to base eligibility for the HAMP program, one of the earliest efforts to stave off the foreclosure crisis, on a means test.

Sanders said such a test makes sense as a method of determining whether applicants have the means to pay their monthly notes and to avoid giving loan modifications to those who don’t really need them. But the U.S. foreclosure crisis was too broad and too fluid for a means test to be effectively applied, he said.

Housing prices were still falling dramatically in 2009 and unemployment was still near 10% with millions of American jobs threatened. Consequently many people were subject to sudden and dramatic shifts in their finances. That instability made it very difficult to use a means test with a rigid criteria to determine eligibility for a government sponsored loan modification.

“I understand the decision, but what you end up with is exactly what we have: many requests, tons of paperwork and lots of fraud,” said Sanders.

Indeed, the Homeownership Preservation Foundation, a non-profit advocacy group, released a report earlier this month that showed incidence of foreclosure fraud has increased by 60% in the past year as the government has essentially doubled down on its loan modification efforts.

“Regretfully, every new government initiative spawns a slew of foreclosure avoidance scams, often from the same cast of characters doing business under various names to avoid easy detection and identifications,” said Colleen Hernandez, chief executive of HPF.

Every description of the loan modification application process is virtually the same: a blizzard of paperwork is requested by the lender or mortgage servicer, then the applicant is kept waiting for weeks or months without word. Meanwhile, the applicant is falling farther and farther behind on their mortgage, a situation that often affects the terms of the modification program to which they’ve applied.

The programs are so numerous and target so many diverse groups – homeowners who are more than 90 days behind in their mortgage payments, homeowners who are current in their payments, unemployed homeowners, veterans, etc. -- that figuring out which program to apply to often requires a lawyer.

Pinto of the American Enterprise Institute said he has used a two word description for implementation of the early HAMP program: “numbing complexity.”

Critics like Pinto also raise the issue of fundamental unfairness. Most of the loan modification programs approved since 2008 benefit people who stopped paying their mortgages but did little or nothing for homeowners who stayed current with their payments. So not only were the defaulters rewarded but the policies led to so-called “strategic defaults” by homeowners who wanted to take advantage of the government-sponsored programs but weren’t eligible because they weren’t deep enough into default.

Pinto questioned the end game of such policies.

“The calls continue for even larger subsidies – there is no logical end until the payment is zero,” he said.