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Yet Another Failure for the Mortgage Modification Program

President Obama’s mortgage modification program, known as the Home Affordable Modification Program or HAMP, was supposed to be the fulfillment of Obama’s promise to take care of Main Street more than Wall Street. Yet, just over a year into his presidency, Wall Street is on the rise and Main Street — or at least the homes that line it — remains on the decline. Not only has Obama’s $75 billion program failed to secure permanent mortgage modifation for more than 116,000 homeowners (while 3 million went into foreclosure) and not only does the Administration now say it won’t help more than 1.5 to 2 million homeowners overall, there’s actually more bad news: it seems to actively discourages lenders from loan forgiveness.

Shahien Naisiripour of the Huffington Post reports that, despite the fact that the average homeowner owes $1.14 for every dollar in current value (and that’s not strictly HAMP-eligible homeowners, that’s overall), mortgage holders are less likely than ever to forgive underwater homeowners.

Mortgage servicers forgave principal on less than two percent of HAMP trial loans, the report notes. But before HAMP, 10 percent of servicer-sponsored mortgage modifications forgave principal, according to the report. Servicers are incentivized to lower monthly payments by getting cash for every sustainable mortgage modification.”HAMP allows principal reduction, but it is not typically implemented in practice,” the report states.

Mortgage holders receive money for modifications — even those that don’t amount to more than a pittance to homeowners — but they don’t get money for principle reductions, so they no longer look at that as an option. The administration’s newest program to incentivize mortgage holders to agree to short sales, or sales worth less than the outstanding value of the mortgage, likely won’t help, as it will encourage lenders to engage in debt forgiveness only if people give up their homes, rather than engaging in loan forgiveness that allows people to stay in them.

Notably, in the long term, mortgage holders would make more money by forgiving the portion of a mortgage that is more than the market value of a home and continuing to collect payments, rather than accept something less than market value and forgive everything above the eventual sales price — but the Administration’s programs aren’t designed to incentivize that behavior. But if banks take the government payout to do short sales in any significant number, they will end up further driving down housing prices, putting more homeowners underwater and creating a snowballing problem.

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