Many people in the mortgage lending industry have had their doubts about whether foreclosure prevention programs like the Home Affordable Modification Program (HAMP) are worth the effort. They say loan modifications won't help people in the kind of financial trouble that leads to foreclosure.
Numbers out this week belie that myth, however. Of those who obtained permanent loan modifications through HAMP, 90 percent have been able to make their payments for nine months.
Unfortunately, critics point out, the HAMP program isn't helping nearly enough people. Rather than the three to four million people the Obama administration hoped would get help through the program, only around half a million troubled homeowners have gotten that relief.
HAMP Program Offers Real Relief, But Far Too Few Qualify
"The program really is a failure," Ira Rheingold, head of the National Association of Consumer Advocates told NPR. "While the numbers may be encouraging for the loan [modifications] that are being done, so much more should have been done that wasn't done."
The Special Inspector General overseeing all of the federal bailout programs issued a report this week that criticized the HAMP program. Unfortunately, it describes a system where people are strung along during the trial period believing that they're making progress toward a permanent loan modification that is ultimately denied.
Homeowners "end up unnecessarily depleting their dwindling savings in an ultimately futile effort" said the report.
A big problem is the way the program is being administered, says Rheingold. The big mortgage banks are in charge of negotiating the loan modifications, but they're overwhelmed with the volume of both HAMP applications and their own attempts to offer alternatives to foreclosure.
As so many people have experienced, the banks lose essential paperwork submitted by homeowners, reject applicants for the wrong reasons, and foreclose in the midst of the application process.
"So many people have gone through that system, have had hope that they could save their homes, and we've seen a lot of people lose their homes who should not have lost their homes," Rheingold says.
How Could HAMP Be Fixed?
Iowa Attorney General Tom Miller has a couple of suggestions for prodding the banks into action. Investigations are now underway in all 50 states and by several federal agencies. Prosecutors believe they have strong cases against the big banks for submitting allegedly fraudulent documents to courts in the foreclosure process. Why not leverage those prosecutions to force the banks into working harder at qualifying people for loan modifications?
Instead of collecting huge fines from misbehaving banks, a better use of those resources might be to get the big banks to "put that money into adequately funding the modification process."
Another option would be to more closely monitor banks' loan modification efforts. All of the big banks have already signed agreements with the Treasury Department to try to qualify homeowners for HAMP before putting a home into foreclosure. An outside monitor could be put into place to ensure they are meeting that commitment.
Whatever the states and the federal government decide to do about HAMP, it's clear that loan modifications can work, but a lot more homeowners are going to need to get through the process or we'll see a lot more economic fallout from this crisis.
Source: NPR, "Obama's Foreclosure Prevention Efforts Criticized," Chris Arnold, October 26, 2010
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