Measuring How Loan Modification Programs Have Performed

The mortgage meltdown of the past three years has been the worst since the Great Depression

. In 2009, the total number of home foreclosures reached 2.8 million, representing a 21-percent rise over 2008 and a huge 120-percent increase compared to 2007. Many more homeowners are in distress; recent reports indicate that the number of borrowers who have fallen behind by at least 60 days has increased every quarter for the past three years. In the fourth quarter of 2009 the percentage of borrowers who were 60 or more days behind on their payments was 6.89%, an increase from 4.58% from the fourth quarter of 2008 - a fifty-percent increase. In 2010 about 4.5 million foreclosure filings are expected.

Why are there so many struggling homeowners? The problem is threefold.

1. An increasing number of homeowners are underwater. Due to the collapse of the real estate market their homes are now worth less than their principal balance. These borrowers may be tempted to abandon their homes and walk away from their mortgages.

2. Some homebuyers are unemployed and cannot pay their mortgage.

3. Some people borrowed more than they could repay, either because of a lack of due diligence or because of unscrupulous actions by lenders eager to make a quick sale.

Making Home Affordable

In an effort to assist struggling borrowers, in February 2009 the Obama Administration introduced the Financial Stability Plan. A central piece of that initiative was Making Home Affordable, a plan that was designed to encourage lenders to work with deserving borrowers who were behind in their payments.

The Making Home Affordable Program offered a variety of options for struggling homeowners:

Modifying qualifying first and second mortgage loans through the Second Lien Modification Program (2MP) and the Home Affordable Modification Program (HAMP)

Refinancing qualifying mortgage loans through the Home Affordable Refinance Program (HARP)

Offering alternatives to foreclosure through the Home Affordable Foreclosure Alternatives Program (HAFA)

When evaluated a year later, the consensus among analysts was that the program was a failure. Through the end of 2009, some sources say that all lenders participating in HARP had entered into a total of just 66,465 permanent modifications out of more than 1 million homeowners who got trial modifications. Other analysts place the success figure as high as 160,000, but no matter how you look at it the number was abysmally small. And even among the borrowers who were given loan modifications, federal reports indicated that more than half defaulted again after nine months.

What was the problem? Twofold. First, the program was voluntary. No bank was compelled to participate. Thus the enormous cost of the great mortgage meltdown could remain squarely on the backs of the defaulting borrowers; lenders were not compelled to share the burden beyond the cost of foreclosure. Second, the modifications involved only cosmetic changes such as a temporary lowering of the interest rate or a lengthening of term. This approach was characterized as "kicking the can down the road", or just postponing the day of reckoning for underwater homeowners.

The HAMP overhaul

In March 2010 the federal government overhauled HAMP. The new initiative was modeled after the Home Owners' Loan Corporation (HOLC), a New Deal agency established in 1933 by the Roosevelt administration. Under the revised HAMP guidance, lenders with Fannie Mae or Freddie Mac loans are compelled to participate. The new HAMP provides for U.S. government insurance for loans that include an actual reduction in the principal balancethe first time during the current crisis such a measure has been included. While for homeowners who are current with their mortgages the idea may cause concern, the belief is that too many foreclosures drives down the value of everyones homes. It is better that your neighbor gets a break, rather than his house is foreclosed and abandoned, making the value of your house plummet.

by: Beth Stewart

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