White House Report Card on Assisting Struggling Homeowners

President Obama has taken a lot of heat for the lack of success of his program design to lessen the affect of the housing crisis. The program was supposed to help distressed homeowners avoid foreclosure, but has fallen far short of the numbers expected. The fact is, the administration has had little success in helping homeowners.

One of the major moves was the $50 billion appropriated to the Home Affordable Modification Program or HAMP, initiated in March 2009. HAMP was supposed to help up to three to four million Americans falling into foreclosure by modifying their loans so that the monthly payment is affordable for borrowers now and sustainable over the long term,” says the information on the HAMP website.

The program’s guidelines were plain and uniform for the bankers to all was suppose to follow several steps to adjust the mortgage amount, which in turn reduces the borrowers monthly mortgage payment to 31% of the homeowners total pretax monthly income. The steps include

• Reducing the mortgage interest rate as low as two percent
• Recalculating mortgage amortization over 40 years
• Deferring a portion of the principal until repayment of the loan
• Waiving mortgage interest on the deferred amount

Mortgage lenders could also choose to forgive a portion of the principal amount prior to applying any of the steps to help borrowers reach the 31 percent cap on monthly mortgage payments.

Mortgage Modification Figures

From the outset, the administration promised HAMP would provide mortgage relief for between three and four million homeowners. However, the Treasury Department own data show that it has not come close to that number. In fact, many of the borrowers who received mortgage modifications in the early stages of the program have since fallen back into default on the modified loans.

The table below reflects the numbers from the program onset through June 30, 2011. Participants approved for the program must start with a three-month trial period for loan modifications. They must complete the trial period successfully – by adhering to the agreed upon terms, before becoming permanently eligible.

In many cases, the trial periods have gone beyond the initial three-month period. For example, the “Aged” column shows the number of trial periods, for each loan service, which have gone longer than six months. The “In Trial” column depicts trials that have not gone on as long.

Foreclosure Prevention Plan Performance

Source: Pro Publica

The above data show figures for loan servicers with more than 5,000 eligible loans. The “Smaller servicers” denotes servicers that participated in the program, but have fewer than 5,000 eligible loans. The “GSE servicers” counts firms that have not enrolled under the Treasury Department’s program, but service Fannie Mae or Freddie Mac owned/ insured loans. Under the “Canceled permanent modifications” heading, of the 67,177 borrowers missed three consecutive monthly mortgage payments and 937 borrowers paid off their loans.

Foreclosures

The foreclosure scandal, which hit the news like a ton of bricks just over a year ago, revealed many homeowner suffered questionable and outright fraudulent practices by banks and servicers when their homes were foreclosed. Banks received so much negative publicity that many placed a moratorium on foreclosures to try to work out the issues involving missing documents, note ownership and robo-signing.

The banks and a committee of state Attorney General and federal officials continue to work on a plan to finalize a settlement. The Attorney Generals of Massachusetts and California have withdrawn from the talk; they plan to take action to get a better settlement for their constituents.

Meanwhile, millions of homeowners continue to have problems making their home mortgage payments, as many people have lost their jobs. The carnage of the housing market has made it difficult for homeowners to obtain a mortgage refinancing or sell their homes-- even as fixed rate mortgages have dropped to one historic low after another.

According to the data analytics company Corelogic, 22.5 percent, of all residential homeowners, or 10.9 million borrowers had properties with negative equity at the end of the second quarter of 2011. An additional 2.4 million homeowner had less than five percent equity in their homes. This means a further erosion of housing values would push these “near-negative equity” homes underwater. The firm also states, 8.1 million of the underwater mortgages have an interest rate 5.1 percent or higher.

The ten states with the highest rates for underwater mortgages: Nevada -- 63% , Arizona -- 50%, Florida -- 46%, Michigan – 36%, California – 31%, Georgia – 30%, Idaho -- 24%, Maryland -- 24%, Virginia – 23% and Ohio – 22%

The Latest Program

The latest program enables the Obama administration to take steps to help a few people without haggling with Congress. It’s an offshoot of the Home Affordable Refinancing Program (HARP), which helped homeowners with little or no equity to refinance their mortgages into low interest rate mortgages. However, Fannie Mae or Freddie Mac had to own the mortgage.

However, HARP had a major obstacle, which prevented many homeowners from participating in the program— mortgages exceeding home values more than 25 percent could not qualify for the low interest rate loan program.

Many homeowners in states like Nevada, Arizona and Florida -- where real estate home values plummeted more than 50 percent from the market’s peak in June 2006 – had no chance of receiving help from HARP.

The new initiative required the administrator of Fannie and Freddie, the Housing Finance Agency (FHFA), to get over its reluctance and work with the Administration to help more homeowners become eligible to refinance

As always, the feedback on this latest Obama initiative runs the entire spectrum. Some analysts think the economy will benefit, but the move will have little impact on foreclosures going forward. The program also continues a pattern of removing financial liability from banks to the shoulders of American taxpayers --who will absorb any defaults under the proposal.

Georgetown law professor Adam Levitin thinks the government needs to exercise more resolve to help homeowners stay in their homes by concentrating resources on principal reduction. Forced mediation between lenders and borrowers, a strategy that has proven successful in Philadelphia and Connecticut, has also been touted as an effective strategy for helping homeowners avoid foreclosure.

Conclusion

The crisis in the housing market has had a debilitating effect on the U.S. economy. When people have concerns about making their mortgage payments, they do not spend as much on other things. Politicians have yet to address a significant part of the matter effectively --jobs and better wages.

Three years after the financial crisis carryover from the Bush administration, partisan politics seem to have priority over putting Americans back to work. This will go a long ways toward keeping people in their homes and encouraging others to purchase from the massive oversupply.