Friday, December 10, 2010


Cut the government’s home modification program

By John F. Wasik, author of The Cul-de-Sac Syndrome

A house for sale is pictured in Alexandria, Virginia March 22, 2010. REUTERS/Molly Riley The government’s Home Affordable Modification Program (HAMP) should be scrapped. It was flawed from the beginning and is not going to get much better in helping people keep their homes. It’s time to start over.

This is not a Scrooge-like gesture, and it certainly won’t decrease the surplus population of foreclosed homes on the U.S. market. The HAMP should be put out of its misery because it’s ill conceived and can be replaced with some more effective measures.

If the White House was truly serious about preserving homeownership, it would have never designed HAMP the way it did. It was loaded with laughable incentives for lenders to lower rates on troubled mortgages, including a $1,000 payment to servicers and lenders. What was the White House thinking? Just getting a decent lawyer to open a file could cost a bank $1,000.

Although the government said it has started more than 3.7 loan modifications, it ignores a stark economic reality: in many cases it makes more sense for the bank to continue to foreclose than to work with the borrower. And the people who are in the worst trouble still can’t afford the loan even at a lower interest rate or are jobless.

Bankers won’t say this, but may prefer foreclosure to modification. Then they can get defaulted loans off their books and eventually lend more money. They can also resell the property once it passes through foreclosure. And during the process, they can assess even more fees for late payments.

The most egregious flaw in HAMP and related programs is that it’s voluntary. In far-too-many cases, banks don’t have to do much of anything except show up in court with their team of lawyers, knowing that homeowners are broke and can’t afford decent representation. Banks don’t even have to return phone calls.

Little wonder that Darrell Issa (R-California), the incoming chairman of the House Oversight Committee, wants to dump HAMP. Let’s say that the government has succeeded in obtaining 500,000 permanent loan modifications where mortgage rates are reduced.

If you round up the number of foreclosures from 2008 to the present to about 6 million, that means that more than 90 percent of defaulted loans go into foreclosure. That’s an appalling record if you’re a government agency trying to save homes. Even if the banks manage to survive federal and state probes into allegedly “robo signing” dodgy loan documents, HAMP still won’t be of much help to struggling homeowners.

Persistent unemployment — at 9.8 percent nationally — is going to push even more homeowners into foreclosure. Even the Fed’s $600 billion QE2 easing of long-term rates isn’t going to stem this ongoing tragedy.

Yet killing HAMP without replacing it with a better program is irresponsible. At least three alternatives loom:

Rent-to-own. Let’s say mortgage servicers are granted the property’s title subject to agreement of the borrower and other interested parties as an alternative to foreclosure. Homeowners are not evicted and become renters at a lower monthly payment. They can rebuild equity and can repurchase at a new market value in the future.

Unemployment Forbearance. While these programs are already offered by some lenders, make them widespread and flexible. Lose your job? You can skip principal payments and only pay interest until you or a spouse/partner are re-employed.

Bankruptcy Write-Off. What if you file to reorganize your debts? There needs to be a provision to write down mortgage balances in some way. You can do that with every other kind of debt.

Any change in HAMP will have to acknowledge that the program does nothing to square a home’s mortgaged value with its current market value. In the hardest-hit areas, home prices have dropped from one-third to one half.

Corporations revalue and dispose of downgraded assets all the time and take write-downs every quarter based on various forms of depreciation. Why can’t homeowners do the same? Turnabout is fair play. After all, didn’t the Fed dole some $3.3 trillion in aid to banks during the meltdown, including some $1.25 trillion in distressed mortgage-backed securities?

Congress has imbued the tax code with multiple tax breaks to promote homeownership. You can deduct everything from mortgage interest on first, second and home-equity loans, escape capital gains taxes in most sales and even write off property taxes (if you itemize).

The biggest break of all would be to legally trigger the right to re-negotiate a home mortgage if a property declines in value. If the American dream is still important to Washington, this is a game changer.

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