HAMP-Strung: Mortgage Modification Program Seeing Too Many Redefaults

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A new federal government report says that more than 163,000 of the 600,000 or so homeowners who received permanent loan modifications under the Home Affordable Modification Program have redefaulted.

A total of $815 million of taxpayer money has been spent on loans that redefaulted, money primarily paid to the banks and loan servicers in incentives to modify those mortgages -- modifications that clearly weren't significant enough to keep those borrowers in their homes for the long haul.

We're From the Government, and We're Here to HAMP

The report's author is Christy L. Romero, the Special Inspector General for the Troubled Asset Relief Program. TARP was the federal government's bailout program for the country's biggest banks, created in the wake of the 2008 financial crash to stabilize the country's failing financial system. Romero is TARP's watchdog, there to make sure the federal government's bailout money is being spent wisely, and to make sure no one on the private-sector side is taking advantage of the program.

The Home Affordable Modification Program, or HAMP, was created in 2009 by the Obama administration to help stem Americans' losses from the the bursting housing bubble that set off the financial crisis, which combined to put millions of American homeowners into foreclosure while threatening millions more with the same fate.

HAMP allowed some mortgage holders who were underwater -- whose loan balances exceeded the value of their homes -- to refinance at lower rates. It also provided incentives to lenders to work with homeowners holding subprime mortgages to modify the terms of loans that were at risk of default.

Problems From the Outset

The money for HAMP came from TARP. So far, about $4.4 billion has been spent to help troubled homeowners. That $815 million spent on loans that redefaulted amounts to 18 percent of the total -- a not insignificant failure rate on the part of the lenders and borrowers.

Who should be held accountable for this? Romero is ready to hand banks and mortgage services the lion's share of the blame. According to her report: "For the substantial number of homeowners who redefault, their modification was not sustainable."

Not surprisingly, homeowners who received the worst deal on a HAMP modification were the most likely to redefault. According to Treasury's database ... the smaller the reduction in a homeowner's mortgage payments and overall debt, the more likely the homeowner was to redefault.

Specifically, the report shows that the majority of HAMP participants received monthly mortgage reductions of less than 10 percent, and 39 percent of them saw monthly reductions of less than 5 percent. When you're struggling -- which in the post-crash economy was and still is very common -- every little bit certainly helps, but a 5 percent or less reduction in your mortgage payment is just that: a little bit. Another key factor for redefaults: Homes that were still underwater even after the modifications.

Beyond that, the report points out, banks are apparently causing themselves and their borrowers further trouble by failing to properly administer the modifications:
Anecdotal evidence suggests that poor service by mortgage servicers contributes to homeowners redefaulting on HAMP permanent modifications. Through its Hotline, SIGTARP has received thousands of calls from the public regarding HAMP, many of them alleging mortgage servicer error and lack of communication or miscommunication.

What sorts of errors?
The circumstances homeowners allege include (1) servicer payment calculation or payment credit errors, (2) problems following a transfer of mortgage ownership or servicing rights, (3) lost paperwork, (4) dual tracking -- when a servicer moves ahead on foreclosure even while a homeowner is in the HAMP modification process, a procedure prohibited under HAMP guidelines, (5) a servicer not honoring a HAMP permanent modification, or (6) homeowners with a change in circumstance. Often there is some combination of these issues. Anecdotal evidence suggests servicers need more improvement.

Time for Some Changes

How does this affect the American taxpayer? Again, according to Romero: "Homeowners who receive a HAMP modification but end up losing their home to foreclosure ... are not being helped to keep their homes as TARP intended, and taxpayers lose the positive impact these funds were to provide for the individual family and the community at large."

What can be done? Under HAMP, there's no requirement that the banks return any money they've received for the redefaulters they've worked with.
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Moving forward, that might be a better way to make sure banks took mortgage modification more seriously: Require clawbacks if the mortgages don't stay out of redefault for some prescribed period of time.

But should the banks have to have their feet held to the fire just to make loan modifications that actually help? Really, they should be doing it themselves, and deep down, everyone from Main Street to Wall Street knows this.

Of course, let's not forget that many people who signed up for big mortgages had no business doing so. They had a hand in the mortgage mess, too, as well as in the problems resulting from the attempts to fix it.

The bottom line? The report says another 88,000 homeowners have already missed a payment or two, and could be the next ones to default on their modified loans. The Treasury Department has already begun to make more changes to the program to help homeowners succeed, but the report has more suggestions.

We can only hope that improvements to HAMP will be enough, and in time, to keep too many more millions of dollars in taxpayer money from being paid to banks for failed attempts to help struggling Americans avoid foreclosure.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the front lines of capitalism on Twitter @TMFGrgurich.
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