Mortgage Crisis Update: Treasury Tinkers with Failed HAMP Program, Delinquencies and Foreclosures Stubbornly Refuse to Go Away
Posted: 03 Apr 2010 09:51 AM PDT
By Alan White
While the stimulus package and bank bailouts have treated the symptoms of the crisis and saved the banking and mortgage finance systems from collapse, the foreclosure crisis itself is about as bad as ever. As the foreclosure crisis enters its fourth year, there are some signs that things are not getting worse, but little evidence they will get better any time soon. New foreclosure starts reached a peak of about 250,000 monthly in the third quarter of 2009, or about quadruple their level in mid-2006 just before the crisis. The fourth quarter saw a significant decline in foreclosures starts, in both the Mortgage Bankers survey and the OCC/OTS report, to something like triple the pre-crisis numbers. On the other hand the inventory of foreclosures remains at their peak of more than three times pre-crisis levels, as do total delinquent mortgages (about one in seven mortgages are now delinquent or in foreclosure, compared to less than one in twenty just before the crisis began.)
Something like 2.2 million foreclosure sales have been completed since July 2007, which should have eliminated almost half a trillion dollars in mortgage debt. On the other hand, an equal number of mortgages have been modified, in the majority of cases resulting in significant increases in mortgage principal through capitalization. Net mortgage borrowing for all Americans has been negative for the past six quarters, but total mortgage debt has declined only slightly, from $10.5 trillion to about $10.2 trillion, from the peak in March 2008 to the Fed’s latest sounding on December 31, 2009. The deleveraging of American homeowners has a long way to go (total mortgage debt was less than $5 trillion at the beginning of 2001.)
Another way to think about it is to compare the drop in mortgage debt to the drop in home values, i.e. just how underwater are we? The Case-Shiller index of home prices has declined about 30% from its peak, and mortgage debt is down by only 3%. This can’t be good. Incidentally, credit card and other consumer debt is down only about 5% from its 2008 peak, after a 30% runup in the five years prior.
The Administration’s HAMP program to address foreclosures by paying servicers to modify mortgages they should be modifying anyway, has failed. It has resulted in a net decline in monthly modifications and no perceptible dent in the foreclosure inventory. The HOPE NOW servicer coalition claims that in January 2010 for the first time HAMP modifications plus modifications servicers did without Treasury help rose to 150,000, significantly higher than the 120,000 monthly total modifications done before HAMP was launched in March 2009. If true this would be good news, but the investor reports I follow are not showing the large increase in modifications HOPE NOW is touting. In any event, 100,000 to 150,000 monthly modifications, even if they were all successful, does not solve the problem of 200,000 new foreclosures filed every month and an inventory of 6 million mortgages delinquent or in foreclosure.
Two weeks ago Treasury announced some tweaks to HAMP that I doubt will have much impact. The tweaks address two important issues, but with inadequate half measures. Servicers are encouraged to assist unemployed homeowners by reducing payments further for three to six months. Most servicers can do this under non-HAMP programs already. A serious program to help the unemployed would subsidize their monthly payments for 12 to 24 months, as Pennsylvania’s HEMAP loan program does.
The second HAMP tweak is an effort to get servicers to include permanent loan principal reduction in their mods. The Hope for Homeowners refinance program already proved that servicers have no interest in voluntarily reducing mortgage debt. Treasury’s new version will offer 10% to 20% subsidies for principal write-down in conjunction with permanent modifications. To date, fewer than 1% of HAMP modifications have included principal write-down. It seems unlikely that a 10% subsidy will change servicer behavior dramatically.
The main difficulty with HAMP has been Treasury’s insistence on being excessively prescriptive in telling servicers how to work out loans. A year into the program, servicers still do two-thirds of their modifications outside HAMP, despite the generous taxpayer subsidies HAMP offers.
Sooner or later banks and investors will realize the absolute necessity of writing down mortgage principal. Instead of nudging, Treasury needs to consider seriously some compulsory write-offs of underwater second mortgages and mandatory principal reduction for owner-occupants who are making modified payments faithfully, often on temporary plans that never seem to become permanent. Unless taxpayer intervention is speeding up the necessary deleveraging process, HAMP expenditures are simply wasted.