The government is giving it one more try — making a new effort to help homeowners who are facing foreclosure. The HAMP — Homeowners Affordable Modification Program — has been thrown into the laundry hamper. Now it is being modified in an attempt to break the surge in foreclosures and the logjam in modifications.
Since HAMP was announced with much fanfare a year ago, it has resulted in permanent modification of only 168,000 mortgages — out of more than 1.7 million potentially eligible cases. That sad result came in spite of the fact that servicers were offered a bonus of $1,000 for each modification and another $1,000 for each year the homeowner stayed in the program, along with incentives to homeowners.
In spite of that program, the banks have simply ignored the concept of modifying loans — except for vague promises of “trial modifications” that rarely result in permanent change. It’s almost as if the banks set out to deliberately discourage modifications. I have received dozens of pleading e-mails from readers, describing lost documents, rude and inattentive bank employees, and broken promises.
Worst of all has been the unwillingness of banks to even talk to homeowners about a modification until a loan is delinquent by 90 days. That’s the Catch-22 of our generation. Becoming delinquent ruins the borrower’s credit and destroys any real chance of a permanent modification. No wonder Americans are frustrated and angry.
Last week, Bank of America said it would not only adjust interest rates, but reduce principal on some loans originated by Countryside (the egregious sub-prime lender it purchased in July 2008) by as much as 30 percent for borrowers who are delinquent and owe about 20 percent more than the current value of the home.
The goal is to modify the mortgage enough so that payments consumes only 31 percent of income. But the loan forgiveness is spread out over five years — and this amount would eventually have to be repaid when the home is sold.
Bank of America says about 45,000 borrowers could see their loan balances reduced, by an average of more than $62,000. They say they’ll contact those who qualify. So don’t be afraid to talk to them if they call.
Then Friday, the government announced new federal mortgage relief for homeowners who are out of work, underwater on their mortgages and/or behind on their payments.
It’s a large group, since one out of every four homeowners owes more than the home is worth.
Under the new program, those who are unemployed will have their loan payments reduced to a maximum of 31 percent of their unemployment benefit for up to six months. Presumably they will find a job during this time. The borrower must be living in the home, have a loan of less than $729,000, be receiving unemployment benefits — and be no more than 90 days late in their mortgage payments.
For those who are working, but at a reduced income that is not enough to cover their current mortgage payments, banks are being encouraged — but not required — to offer a principal reduction, to bring the mortgage down to current values and reduce the monthly payments.
These programs are so complex that I strongly doubt they will stem the tide of foreclosures — if only because of all the red tape and complexity. Only when banks realize that it is costing them more to foreclose or maintain an empty home for sale than it would to modify loans to homeowners under new standards will there be a slowdown in the rush to foreclose and a serious attempt to modify loans.
There is one additional underlying issue: If a bank decides to forgive a portion of its loan, the bank shareholders suffer as lower profits are reported. That may be the best business decision for the bank.
But if the federal government commits $50 billion in TARP funds to principal-reduction programs, as proposed, is this an appropriate use of tax dollars and incentives?
On one hand, falling home values and vacancies as a result of foreclosures will affect all nearby homeowners. So maybe we do have a vested interest in having tax dollars used to support the market.
On the other hand, what message does this send to those who have been struggling to make the payments on their homes — or to those who paid off their mortgages? Is it fair for the government to take their tax dollars to subsidize their troubled neighbors — even if it does improve the neighborhood?
It’s worth debating. But this kind of debate in Washington is akin to “Nero fiddling while Rome burns.” While we attempt these ineffectual programs, we are destroying the concept of homeownership as the centerpiece of the American economy and the American dream. And that’s The Savage Truth.