The Administration's new effort to keep defaulting families in their homes by modifying their mortgages learned important lessons from problems encountered by its first effort, the Home Affordable Modification Program (HAMP).
A year after it launched, HAMP has succeeded in permanently modifying fewer than 200,000 of the three to four million mortgages set by Secretary Geithner as a goal when the program was announced March 4, 2009.
Last week two influential House Republicans, Congressmen Darrell Issa (R-Calif.) and Jim Jordan (R-Ohio), took the Obama Administration to task for "misstating accomplishments" of its Home Affordable Modification Program and "trying to confuse the American people."
The original HAMP program failed to address the question of second mortgages. About half of all defaulting homeowners have a second mortgage. Second lien holders received no incentive to forgive defaulting homeowners and their intransigence stalled modification efforts. A fix for the problem was added into the program last summer, but second liens remained a challenge. The new effort doubles the amount paid to lenders that help modify second mortgages.
The fees provided servicers to modify loans under the program failed to generate the participation necessary to reach its goal. One reason was the reluctance of lenders to reduce principal, a difficult problem when a loan is securitized and owned by investors, yet the FDIC's program for IndyMac borrowers, on which HAMP was based, included principal reduction as a centerpiece.
Banks and other lenders will be asked to reduce the principal owed on a loan if the amount is 15 percent more than their home is worth. The reduced amount would be set aside and forgiven by the lender over three years, as long as the homeowner remained current on the loan.
Third, the new initiative increases the incentives paid to those lenders that find a way to avoid foreclosing on delinquent borrowers aside from mortgage modification, such as short sales.
Finally, the FHA will offer incentives to lenders that help underwater borrowers refinance into a more affordable loan and reduce the amount they owe on their primary but not secondary mortgages by at least 10 percent. The new loan and any second mortgage could not exceed 15 percent of the home's value.
The Administration's refinancing effort, known as Home Affordable Refinance Program, or HARP, has also been a disappointment. HARP was designed to encourage banks to consider new terms for four to five million struggling homeowners. By the end of its first year, only 191,000 loans had been refinanced under HARP. Last October the Federal Housing Finance Agency expanded the program to many homeowners whose mortgage exceeded the value of their home by including loans with loan-to-value ratios as high as 125 percent. On March 1, the FHFA extended HARP until June 20, 2011.