The Home Affordable Modification Program (HAMP) Has Not Worked
The Home Affordable Modification Program (HAMP) Has Not Worked
In February 2009, President Obama implemented the Home Affordable Modification Program (HAMP) to fight the foreclosure crisis. HAMP, scheduled to end on December 31, 2012, was created to assist homeowners, delinquent with mortgage payments, by allowing modifications to their loans.
HAMP has been unsuccessful. The program was supposed to help 3 to 4 million homeowners avoid foreclosure, but is not projected to be anywhere near that figure when the program ends. The Treasury Department ("Treasury") finds the less than 500,000 permanent modifications reported so far "disappointing." The Special Inspector General stated "disappointing results have raised questions about [the] program's effectiveness." Federal Auditors' report that HAMP makes some homeowners worse off, causing foreclosures it's supposed to prevent by increasing the debt and length of default.
Loans are modified through interest rate reductions, term length extensions, or loan balance reductions. The application process takes up to six months to determine if homeowners qualify. Upon approval, homeowners must complete a three-month trial period when they must pay what the modified payments would be. After the trial period, homeowners are eligible to apply for a permanent modification. If approved, homeowners must make payments for five years to remain in HAMP. Homeowners can receive a $1,000 per year reduction from their loan's principal balance if payments are continuously made under the modification.
Homeowners are critical of HAMP. Many claim documentation requirements in the application period are overly harsh and are not consistently followed. Similarly, lost paperwork by servicers, contradictory advice from customer service representatives, and lengthy wait times to receive answers are common complaints. The Government Accountability Office found some servicers are not systematically tracking HAMP complaints. The volume of complaints caused a Congressional Oversight Panel to urge Treasury to investigate whether documentation problems are undermining HAMP.
There is ambiguity as to whether trial payments are applied to loan principal. While making trial payments, a borrower's existing loan remains in effect. Therefore, even though homeowners are making trial payments, obligations under the existing loan are falling behind. The Federal Reserve notes that homeowners may owe more on their home than before they utilized HAMP because of fees, surcharges, and delinquencies incorporated into the modification.
HAMP was designed to carry out the public-policy goal of keeping families in their homes. The critical flaw in the program, however, is that HAMP is relying on private servicers to achieve its goals. The following changes could significantly improve HAMP. First, Treasury should modify the borrower complaint process. Complaints should be removed from the servicers' authority in favor of an independent and enforceable review body. This would create a legitimate appeals process. Additionally, Treasury should make use of its enforcement authority against servicers. Rewarding or punishing servicers, where appropriate, will incentivize servicers to focus on borrower goals. Publicly announcing problem servicers and their sanctions will build a credible deterrent for non-compliance.
There must be more transparency. Homeowners should be entitled to see all documents related to the proposed modification and denial. This is especially important in light of the fact that servicers' losing documentation has been a consistent problem and the most common cause of denial. Finally, there should be automatic conversion to permanent modification upon successful competition of a trial modification. This would eliminate the excessive delays and would add fairness to the process.
After 18 months, approximately 1.3 million homeowners participated in trial modifications. Less than 500,000 homeowners, however, received permanent modification. Compare this with 2.8 million foreclosures in 2009 and anticipated 3.9 million in 2010. Of 6.7 million foreclosures, HAMP only assisted 7 percent of homeowners in foreclosure crisis.
So far, HAMP has not helped reduce the foreclosure crisis, it may have only prolonged the problem. Only through changes in the application process, transparency, independent complaint review and enforcement, and a reasonable application period, will servicers be required to further the very commendable public-policy of keeping families in their homes.
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