(Part One.) The Congressional Oversight Panel released a new report today, A Review of Treasury’s Foreclosure Prevention Programs. But first, here is Phyllis Caldwell, chief of the Treasury Homeownership Preservation Office, defending the the HAMP program to Ezra Klein:
Run me through the numbers here. How many people did HAMP reach?
PC: There’ve been roughly 1.3 million trial modifications. You have to remember that up until June of 2010, folks could open into a trial modification by simply calling up and asking for it. After June, we began checking their incomes before they entered the program. There have been about 460,000 permanent modifications.
The implication is that the permanent modifications are pretty much solid and good-to-go. That, empirically, the rate of defaults that occur after the modification, the redefault rate, are going to be relatively modest. They’ve publicly estimated that the rate of redefault will be something like 40% over five years. So if you make it to a permanent modification you are clear.
The newest COP report finds that this isn’t true. To say the least. Page 96:
Look at those skyrocket! As Adam Levitin summarizes:
First, 21% of HAMP permanent modifications have redefaulted in their first year. That’s ghastly given that HAMP permanent modifications have an additional 3 months of trial seasoning and fairly serious payment reductions. The fact that Treasury hasn’t been reporting on this itself, much less analyzing the reasons for the redefaults is disgraceful.
Second, if past trends continue, starting this month, there will be more HAMP redefaults each month than new permanent modifications. That means that the total number of active permanent modifications will peak at around 500,000 and decline….
The risk factors for HAMP permanent modifications are not front-loaded. A front-loaded risk would be unaffordable monthly payments. HAMP does a reasonable job on lowering monthly payments. But HAMP permanent modifications have high negative equity, balloon payments, interest rates that will rise over time (often from 2% to 5%, meaning a significant monthly payment increase), and high back-end debt-to-income ratios. These are all time bombs. They come in addition to the typical horsemen of default: death, disability, dismissal, and divorce, to which we can add the amplifier of the worst economy in 70 years.
The Oversight Panel report notes that if one calculated the HAMP redefault rate including the 146,031 trial modifications that failed to convert to permanent because of a payment default (the others failed to convert because they were not eligible due to loan or borrower characteristics), the real annual redefault rate would be 44% and the 15-month redefault rate would be 50%!
Read the whole thing. More from Levitin:
Is HAMP a worthwhile program?
It’s hard to say that it is…
Ultimately, the message to take away from HAMP is that the Obama administration just isn’t serious about helping homeowners. The plight of distressed homeowners’ is subsidiary to protecting the banks from having to take serious write-downs…
And there really isn’t any way to deleverage consumers without there being losses for the financial sector. And that all leads to Figure 14 on p. 58 of the report, which shows the second lien loan exposure of the Big 4 banks relative to their Tier 1 capital. Here are the ratios:
What this means is that principal reductions on any scale will render the Big 4 (and plenty of smaller banks) seriously undercapitalized, if not outright insolvent. And so the game the Administration has decided to play is extend and pretent. Indeed, HAMP’s basic goal was to buy time for the banks while the housing market and economy recovered…
As it turns out, there are system capacity issues that limit the number of properties that can hit the market at any time. The system doesn’t seem capable of churning through much more than 2 million foreclosures in a year. HAMP might have bought some time, but the gamble on resurrection clearly hasn’t paid off yet, unless one defines resurrection downwards. And we’re looking another perhaps 10% drop in home prices this year, which combined with a still fragile financial sector and lots of systemic risk from sovereign debt (European and US states)…
I’m not sure what more needs to be added, other than some serious investigations on how this failed so spectacularly. That the redefault issue is so high means that there is a massive opportunity cost with people going through HAMP rather than just defaulting if they can’t make their payments. People will spend months or perhaps even a year desperately jumping through hoops only to lose their house later, even when they get the “good” permanent modification, when they could have been rebuilding their lives in new places with new opportunities.