The Problems with HAMP
The U.S. Treasury reported in February 2010 that almost one million homeowners have obtained modifications under the Home Affordable Modification Program (HAMP). Critics, and tepid supporters, questioned the metrics the Treasury used, and how effective the program has been. Part of the 2009 Economic Stabilization Act included the Making Home Affordable plan—“a plan to stabilize the housing market and help struggling homeowners get relief and avoid foreclosure.”
It has been more than a year since the plan began and the results, overall, are not good. The problems with the current loan modification process are significant and not likely to be resolved before the program ends. From a simple numbers perspective, anyone dealing with the problem—attorney, debt relief counselor, or mortgage modification company—will state that helping one million is slight compared to the number of individuals who need help. But the problems are not only with the small number of individuals obtaining a permanent modification of their existing mortgage; they are systemic problems when the program was launched.
It appears that lenders are generally ill-equipped to help homeowners and homeowners are generally limited in the recourse they have to protect their homes once they are unable to meet the original obligations to their lenders.
The dilemma facing homeowners is the lack of alternatives. Basic guidelines for HAMP eligibility are simple: a one- to four-unit dwelling with the borrower residing at the property; a mortgage obtained before January 1, 2009; and a total loan unpaid balance of under $729,750 (for a one-unit property). After meeting the lender or investor requirements for a modification, the borrowers are placed into a temporary modification that sets payment terms and other conditions. Typically there are three trial payments, but that does not mean it take only three months to convert a temporary into a permanent modification. During the modification application process, the homeowner is under a threat of foreclosure that doesn’t end until a permanent modification is in place.
Under the current scheme, however, homeowners are behind from the start—beginning with eligibility. Borrowers are often told they need to be at least 60 days late with payments before a lender will help. Now delinquent, homeowners encounter a bureaucratic nightmare: re-sending documents over and over; demands for documents that don’t exits (such as next month’s utilities to establish residency); lost documents; conflicting responses; no responses; or, worst of all, a conversation with the lender to learn how the home was sold at foreclosure while a modification was pending.
Additionally, there is also a lack of incentives for lenders, who, in order to comply with the process, must create departments to handle the incoming flood of applications and information. The delay from the time a submission reaches the lender’s loan “advisor” can take weeks. This is problematic for a borrower facing a trustee sale of the property; documentation that might persuade the lender to stop the sale and modify the mortgage is now “in process.” Further, as many loans were securitized and sold, the current investors for the loans must be located (they are not always readily known) in order to approve new terms.
Many borrowers also lack strong advocates. The company servicing the loan has limited incentives to assist homeowners. Penalties for noncompliance are ineffective, the staff is overwhelmed, and it tends to be a money-losing process for the bank. Some borrowers find legal representation to fight the banks, but these attorneys find themselves in complex new areas of law and banks are aggressively litigating on all points.
Finally, lenders, especially large banks, suffer from an image problem and are responding to investors who have seen their investment plummet. Eager to get questionable mortgages off the books, the banks have no incentive to modify a loan. If the property is foreclosed and a loss is realized by the sale of the “toxic” mortgage, the bank can go to investors seeking new capital explaining they have “cleaned-up” the outstanding liabilities, signaling an end to losses.
Lacking real incentives for lenders, this past year has shown that the current scheme will only impel banks to do enough to avoid the worst of penalties and fines from the federal government. The modification of the first mortgage does not resolve a number of other problems that borrowers face. There are issues of bankruptcy, second liens on the home, financial (and at times emotional) counseling, and a working process that protects homeowners that need to be addressed. While Treasury’s oversight of HAMP indicates the program is a work-in-progress, that progress will be far too late for most homeowners.
Drew Winghart is the principal of the Winghart Law Group in Redwood City, CA, where he practices insurance coverage, business, and real estate litigation, including representing homeowners against lenders. Contact him at Drew@WinghartLaw.com or visit his Web site at www.winghartlaw.com.
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