Why the HAMP “Enhancements” Won’t Help Stem Foreclosures

It’s pretty clear that the housing crisis is a huge part of this economic downturn.   In my foreclosure prevention work, I have seen the difficulty homeowners are having as a result of job loss, reduction of income, medical expenses and other hardships.  About a year ago, the Obama Administration trotted out the Home Affordable Modification Program (HAMP).  The plan set forth a process for servicers to modify mortgages to help homeowners who suffered a hardship and were unable to make their full monthly mortgage payments.  HAMP is a voluntary program, but just about all the large banks and servicers signed up for it.  Despite participation by most of the big players, it’s also pretty clear that HAMP has been minimally effective at preventing foreclosures and will not come close to reaching its goal of assisting up to 3 to 4 millions homeowners by the end of 2012.

In an effort to  meet its goals, the Obama Administration offered several changes and additions to HAMP on March 26, 2010.  Details of the changes can be found here, but the basic changes are as follows:

1. Temporary assistance for unemployed homeowners while they look for work
2. Servicers will be required to consider principal write-downs
3. Improving servicer procedures in order to reach more borrowers
4. Help for homeowners who need to move to more affordable housing

I applaud the Administration for addressing the fact that increased unemployment is a large reason homeowners are struggling.  It’s also good to see that they are (sort of) addressing the need for more principal write-downs (being “required” to “consider” something is not very useful in my mind).  But here’s the problem:  These “enhancements” will do little to improve the effectiveness of HAMP.  Why?  Because the failure of HAMP is directly tied to the failure of the servicers to properly carry out the program and those problems have not been addressed by the recent changes to HAMP. 

Problem #1: Servicers have not hired enough people to work on modifications and those they have employed are overworked, underpaid and poorly trained.  Homeowners are waiting months to get answers to their modification requests.  It’s very difficult to get someone on the phone who can actually help a homeowner. Servicers are using incorrect financial information which is resulting in eligible homeowners being denied a modification.  Homeowners have also had a great deal of difficulty getting straight answers regarding their situation and the program when they contact their servicer.  If the servicers do not train their employees properly, the program will not work.  I don’t care how many enhancements you throw into it.

Problem #2:  The servicers are not being held accountable for the incompetence that is coming from their offices.  Servicers have been able to ignore the rules of the program and there are no negative ramifications.  Homeowners are ignored, given misinformation, and treated with gross disrespect by the servicers and there is little anyone has been able to do to stop this.  Until there is some way to enforce the rules, this program will not be successful.

Problem #3: Principal write-downs are not mandatory.  Principal write-downs are currently voluntary under HAMP.  The enhancement will require the servicer to run the homeowners through a program that forces them to look at principal write-downs.  But servicers can still decide not to offer write-downs to homeowner.  I don’t expect write-downs to become a common practice without the Administration penalizing servicers for not writing-down mortgages.  Under the enhancements, there are incentives for servicers that offer principal write-downs.  However, it doesn’t look like servicers respond to carrots.  They respond to sticks.  I don’t expect to see significant changes simply because the Administration is prodding the servicers to consider this option.

Problem #4: Treasury does not require that the servicers fully disclose the numbers and information that are used in the Net Present Value  Test (NPV).  The NPV is defined as the present value of the estimated future cash inflows minus the present value of the cash outflows.  The test is a crucial part of HAMP and is used by the servicers to determine whether they should modify a mortgage.  A positive NPV means that it is in the best interest of the servicer and investor to modify for the mortgage.  A negative NPV means that it is not in the best interest of the servicer and investor to modify the mortgage and they are free to deny that homeowner a modification.  Variables included in the NPV include the borrower’s monthly income, the unpaid principal balance of the mortgage, the current value of the home, home price appreciation forecast and many other numbers.  The numbers that are included in the NPV are crucial, but there is a lack of transparency regarding the numbers that are used.  There is also no one overseeing the process to make sure that correct numbers are being used in the calculation.  As a result, homeowners who are eligible for the program are being turned away because the servicers are using incorrect information.

Problem #5:  The program to help address the burden of second liens, the Second Lien Modification Program, or 2MP, has yet to have an impact.  The program was announced in 2009 but details have been slow to surface and servicers (Wells Fargo, J.P. Morgan Chase & Co., Bank of America and Citi) have only recently signed on to the program.  I don’t have much hope for the effectiveness of this program because 2MP will require coordination with HAMP.  How can a supplemental program be successful if the primary program has been a flop?

I hope I’m wrong about these problems persisting.  I hope these enhancements get the banks to provide more help to responsible homeowners who are just looking to get through a rough patch.  But I believe the servicers need to be held accountable for their failure to properly implement the rules of the program as they have been laid out by the Administration.  Until there are ramifications for failing to follow the rules, it will be difficult for this program to succeed.

Home Sweet Home

I recently attended a foreclosure program in the Bronx which discussed the effect of foreclosure on tenants.  One of the spearkers stated that  a tenant who has been evicted because his or her building was foreclosed on may have difficulty finding a new apartment because the eviction will show up on the tenant’s credit report. 

That doesn’t sound right, I thought.  I raised my hand to ask for clarification when a woman behind me asked my question before I could. 

“Can you clarify what you just said about a tenant having difficulty finding a new apartment because the landlord was foreclosed on?  If the tenant was evicted through no fault of his own, why would this stop the tenant from finding another rental?”

Unfortunately, there was nothing to clarify.  The fact of the matter is, yes, this type of eviction will show up on your credit report.   And while there are different types of evictions, it will not always be clear that the eviction was the result of a foreclosure. 

Throughout this economic crisis, we have all become acutely aware of the unfairness of life.  Innocent people are getting hurt.  So what do you do?  How do you avoid this same fate?  Make it your business to understand how things work (please note that much of the following information is specific to New York).

1. Have enough money in an emergency fund to make a move

• Now, I’m a firm believer in a 6 to 9 month emergency fund (yes, it has increased from 3 to 6 months due to the economic downturn).  This number can be daunting to many people.  But if you can’t save up that much, try to make sure you have enough for first month’s rent, last month’s rent and moving expenses.  The foreclosure process in New York State normally takes about 6 months or more from the filing of the case to auction.  But guess what?  Tenants may not be notified of the impending foreclosure until very late in the game.  Have money saved so that you can decide to move rather than be evicted.

2. Do some research

• Foreclosure information is PUBLIC information.  If you have any concern that your landlord may be in trouble,  look for his or her information online.  The Office of Court Administration has a website of active cases (www.courts.state.ny.us/admin/oca).  I realize that many people won’t take this extra step.  If you don’t know whether your landlord is in trouble, you aren’t going to spend a lot of your free time visiting this website.  But, if you do suspect something, it’s important to know that this information is readily available. 

3. Make sure your lease is current

• It’s not unusual to see a tenant who hasn’t signed a lease in years.  Tenants and landlords become comfortable with each other.  The landlord isn’t raising the rent so the tenant is happy to continue living in the apartment without signing a new piece of paper each year.  This can be dangerous.  A lease is not a bullet proof shield against eviction.  However, a tenant with a lease generally has more rights and claims than a month to month tenant.  In some cases, a tenant with a lease may not have to move, even if the new owner tries to evict him.

4.  Know your rights!

• Ok, this piece of advice applies to all situations.  If someone brings you some bad news, determine if there’s a way for you to fight back.  Don’t assume that you’re completely out of luck.  If you are completely blindsided by the information that your building is being foreclosed on, speak with a legal aid attorney (or any other attorney that offers free advice).  Tenants aren’t completely helpless in these situations.  For example, the tenant can often ask the court for time to move.  This may seem small but it may give a tenant time to save money and find a place on her own terms.  Find out what your options are and speak to an expert before you make a move.

It Happens Where You Least Expect It…

The May 17th Sunday magazine of The New York Times has an story that I think most of us would be surprised to read.  It reminds me of the story of the shoemaker’s children going without shoes.  The article, My Personal Credit Crisis, is the story of an economics reporter for The New York Times.  The reporter’s name is Edmund L. Andrews.  Mr. Andrews who made a series of irrational decisions and ended up buying a home that he could not afford.  His home is currently in foreclosure.  The article can be found here: http://www.nytimes.com/2009/05/17/magazine/17foreclosure-t.html?_r=1&em

This story bewilders me.  Here is someone who reported on the Federal Reserve and financial crises throughout the world.  How did he get himself in this kind of trouble?  Unfortunately, Mr. Andrews’ story is becoming more and more common.  He, along with Bernard Madoff’s victims, is educated with access to a great deal of knowledge and information.  They were all supposed to know better.  How did they fall into these traps?

I think most of us became swept up in the prosperity and high living that we experienced in this last boom.  And it’s not a bad thing to take risk or even gamble a little.  But we shouldn’t be making gambles that we cannot afford to lose.   And no matter what your level of knowledge, let us all remember that we are not invincible.  Mr. Andrews took a risk that his wife would land a job that would allow him to pay his mortgage.  This didn’t happen, things snowballed and his poor decisions caught up with him.  Can you afford for your luck to run out?

Think about your gambles and risks.  Have you made decisions that you know are wrong?  Have you brushed aside that little angel on your shoulder that is saying, this doesn’t seem right?  Now is the time to rethink our decisions and correct them if we can.  For many of us, it’s not too late.