All I Want for Christmas is a New First Mortgage

December 27, 2010 (Chris Moore)
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Every year at Christmas there’s always that one “hard to get” item that always seems to be impossible to find. This year proved to be no different. But instead of a doll, or a toy, or the latest electronic gadget, it was a loan modification.

The Treasury Department reported last week that nearly 774,000 homeowners had dropped out of its main foreclosure-relief program, Home Affordable Modification Program (HAMP), through November 2010. That’s about 54 percent of the more than 1.4 million people who have applied for the program.

Originally touted by the Obama Administration of having a goal of saving 8 to 13 million homeowners by 2012, and later “downgraded” to 3 to 4 million, the program hasn’t even come close to achieving its goal and won’t.

However, the program reached more homeowners in November than in October. The number of new trial modifications increased to about 30,000, up from about 24,000 in October. And the number of trial modifications that turned permanent rose to about 31,000, up from about 26,000.

So what’s gone wrong?

Homeowners applying to the foreclosure-relief program say the program is a bureaucratic mess, with banks losing documents and failing to return phone calls. Banks blame homeowners for failing to submit needed paperwork.

A recent Congressional Oversight Panel released a report that says the government’s foreclosure prevention program needs an overhaul because it is just not working.

The report pointed out a multitude of shortcomings within the program. HAMP did not take into account the complexity of the mortgage relationship. Rather than a one to one borrower/lender situation, most mortgages involve a servicer whose interests may collide with that of both of the other parties.

The report, without using the term, points to the misaligned incentives that have been named by various regulators a dozen times in recent weeks as a major problem in averting foreclosures. Those misaligned incentives mean that servicers can make more money and get it faster through a foreclosure than through any kind of intervention or modification.

HAMP’s attempts to correct this market distortion by offering payments to servicers, the report says, appear to have fallen short, in part because servicers were not required to participate in the program. The servicers could be pressured by Treasury to sign up for the program, the report says, but could not be pressured to actually do the modifications. The existence of second mortgages also stymied foreclosures where the holders found they could profit from blocking the modification of the senior lien.

The report concludes “Treasury’s reluctance to acknowledge HAMP’s shortcomings has had real consequences. Absent a dramatic and unexpected increase in HAMP enrollment, many billions of dollars set aside for foreclosure mitigation may well be left unused. As a result an untold number of borrowers may go without help – all because Treasury failed to acknowledge HAMP’s shortcomings in time.”

All of this brings little solitude during the holiday season to the thousands of homeowners who entered the program with the intention of saving their homes and in the end losing it to foreclosure.

Tags: hamp, treasury department, mortgage loan modification, foreclosure, foreclosure relief, mortgage lenders, mortgage servicers