How A Program To Aid Distressed Homeowners Fell Short

The Record ( — Sunday, February 10, 2013

The Record

As millions of Americans struggled to pay their mortgages in 2009, the U.S. Treasury rolled out a $75 billion plan to encourage the mortgage industry to modify home loans to make them affordable. The plan, called the Home Affordable Mortgage Program, was expected to help as many as 3 million to 4 million homeowners.

Four years later, the program has fallen well short of its goals, with about 1.1 million mortgages permanently modified through HAMP. (In addition, 4.8 million loans have been modified through lenders' private programs.)

Many homeowners have been left frustrated by the modification process. Victoria Manga of Butler, for example, applied several times for loan modifications after she lost her job in 2008 and her husband lost his cabinetmaking business in 2009.

Strict guidelines

"I was declined three times for a modification," said Manga, 46. "There's really no help anywhere. Where do you go, what do you do?"

Why hasn't the program lived up to expectations?

David Stevens, chief executive of the Mortgage Bankers Association, who worked on HAMP as a housing official in the Obama administration, said that the program needed tight eligibility guidelines to ensure that taxpayers funds weren't used to help homeowners who might try to take advantage of the program even though they could actually afford to pay.

Others in the mortgage industry say it took time to train workers to modify loans and that rising unemployment made it impossible for many troubled homeowners to afford even reduced mortgage payments.

On the other hand, consumer advocates say the government made a mistake not requiring mortgage servicers to modify loans but merely offering them incentives to do so. As a result, they say, many servicers didn't invest in hiring and training enough staff.

"The program depended too much on the good faith of servicers," said Ira Rheingold, executive director of the National Association of Consumer Advocates.

"Servicers were not really very interested in doing loan modifications," said Diane Thompson, a lawyer with the National Consumer Law Center. "It's expensive to have to staff up" to handle the work involved.

In addition, consumer advocates say the program should have required loan servicers to reduce the amount of principal owed, not just the interest rate.

Treasury spokeswoman Andrea Risotto defended HAMP, saying it "paved the way for more sustainable options for homeowners to avoid foreclosure than were ever available before." The program, she said, was revised and strengthened during its first 18 months, with the result that homeowners who received HAMP loan modifications save a median of $544 each month.

"Homeowners who enter HAMP today have a strong likelihood of long-term success in the program," Risotto said. "Eighty-seven percent of homeowners who started the program in the last 2 1/2 years have received a permanent modification of their mortgage through HAMP."

Slow to prepare

Eric Selk, a spokesman for HOPE NOW, an alliance of lenders and housing counselors, acknowledged that the industry, overwhelmed by the number of distressed homeowners, took a while to train workers on modifications. "There was a learning curve," he said.

A recent study by economists from the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency and four universities found that some lenders were especially unprepared to do loan modifications, and that if they had performed at a higher level, 800,000 more homeowners could have been helped by HAMP.

Selk said that the pace of modifications has picked up — to the point that HAMP may well reach its original goal by the time the program runs out at the end of this year.

Under HAMP, mortgage servicers are supposed to help distressed homeowners bring their monthly housing payments to no more than 31 percent of their income. They do this, said Thompson, by extending the life of the loan to as long as 40 years, and by lowering the interest rate to as low as 2 percent. They also tack any missed payments onto the amount that is owed, which increases the principal.

The mortgage industry's private modifications tend to be less generous and less helpful than HAMP modifications, according to Thompson and Rheingold. The Office of the Comptroller of the Currency says that private loan modifications cut monthly payments by an average $345 a month, compared with the HAMP's median reduction of $544.

Homeowners in private modifications are also more likely to default, according to consumer advocates. Selk of HOPE NOW said that's because the most creditworthy homeowners often end up in HAMP, while the private programs accept people in worse financial shape.

Consumer advocates also say homeowners who are deeply underwater — that is, owing much more than the property is worth — could be helped more if mortgage servicers cut the amount of principal owed.

Selk, of the lenders' group, said that in many cases, the investors who actually own the loans wouldn't allow the principal to be reduced.

However, Stevens pointed out that under a $26 billion settlement last year among 49 state attorneys general and five large lenders over foreclosure abuses, more homeowners are getting principal reductions.

Despite his criticisms of HAMP, Rheingold says it has done some good and helped many homeowners.

"Without HAMP, it would have been even worse," he said.

The program faced a challenge as unemployment rates soared in the recession. Unemployment remains above 9 percent in New Jersey. Without paychecks, many households simply couldn't support even a modified mortgage.

"You had the perfect storm," Selk said. "They rolled out the program at the same time that the [economic] foundation you were standing on was falling away."

One major frustration for homeowners seeking loan modifications is that they were often asked to send paperwork repeatedly because the mortgage servicer misplaced it. Selk acknowledged that this was a big problem but said that has become less of an issue in the last year or so, since servicers began using an online tool, called LoanPort, that tracks the documents received.

Bonita Holmes, director of loan counseling at NJ Citizen Action, agreed that LoanPort has cut down on paperwork issues.

Manga, the Butler homeowner, said she and her husband will be able to keep their house, even though their lender turned down their requests to lower their 7.9 percent mortgage rate.

They bought the home in 2007 — near the market's peak — for $495,000, and their monthly payments top $3,000. Their efforts to shed the mortgage by selling the house were unsuccessful, because the value of the property has dropped in the housing bust.

Both formerly worked in fields that benefited from the recent housing boom — Victoria Manga worked in sales for a waste company that disposed of construction and demolition debris, and her husband, Wil, had a high-end cabinetmaking business in New York. Their jobs disappeared when the bottom dropped out of the housing market.

They have begun to recover, though their income is less than half of what they made in more prosperous times. Manga has started a cleaning business, and her husband builds the interiors of dollar stores. In this economy, there's a lot more demand for that than for luxury kitchen cabinets.

"We're not going to give up," said Victoria Manga.

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