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If analysts subscribed to the “if you can’t say something nice, don’t say anything” philosophy, they wouldn’t be saying much about the Home Affordable Mortgage Program (HAMP), the Obama Administration’s flagship foreclosure assistance initiative. What they are saying continues to be largely, if not entirely, negative.

Recent government reports have supported analysts’ complaints that the program is not doing enough to prevent foreclosures and the domino effect they have on home prices and home sales. The number of new homeowners obtaining trial modifications (the first step toward permanent modifications under HAMP) declined by 35 percent to 15,000 in June – a one-year low and the third consecutive month in which foreclosures exceeded new modifications, according to the Treasury Department’s most recent report on HAMP’s progress. The report also found that 40 percent of the 1.3 million borrowers who have had their loans modified under HAMP have fallen out of the program, either because they re-defaulted or failed to meet HAMP‘s reporting, income, and other requirements.

The Federal Housing Finance Agency reported that while modifications initiated by Fannie Mae and Freddie Mac increased by nearly 24 percent in the second quarter, foreclosures started by the two GSEs increased by nearly 12 percent and completed foreclosures and third-party sales increased by almost 15 percent.

A separate report by RealtyTrac tallied five homes in foreclosure for every new modification initiated in August, compared with a 2 for 1 ratio in December.

Testifying recently at a Congressional hearing, Neil Barofsky, the special inspector general for the Troubled Asset Relief Program (TARP), cited the lack of clearly defined and clearly expressed goals as “one of [HAMP’s] greatest failures.”

Elizabeth Warren, chair of the Congressional Oversight Panel for TARP and a leading candidate for the newly established Consumer Financial Protection Bureau, agreed. As the epicenter of the foreclosure crisis has shifted from flawed loans to unemployment, she told legislators, HAMP has struggled to adjust, remaining consistently “behind the curve. It’s too slow and it’s too small,” she said.

Equally problematic, Warren suggested, the program’s incentives are misplaced. “In many cases, the servicers can continue to make more money if the family goes through foreclosure. It’s just not a program that’s working for homeowners. It’s not a program in some cases that’s working for investors. And most importantly, it’s not a program that’s working for the economy overall.”

Administration officials counter that critics are ignoring or at least downplaying the program’s successes, citing, among other positives, the number of homeowners (about 389,000) whose mortgage payments have been reduced by an average of $510 and recent statistics indicating that the number of HAMP-assisted borrowers who have re-defaulted has been declining.

A recent report found that a little less than 6 percent of borrowers who have received permanent HAMP modifications have defaulted after six months; the default rate for the approximately 4000 homeowners receiving modifications at least 9 months ago is less than 8 percent.

Alan White, a law professor at Valparaiso University, who has been among the most outspoken critics of HAMP, told Huffington Post he was “impressed” by those statistics. “It’s still early,” he said, “but re-defaults below 10 percent are a significant improvement” compared with default rates of 40 percent and 60 percent, respectively, for modifications arranged in 207 and 2008.

Still, White said, HAMP’s results would be much better if the program required servicers to reduce principal payments. Administration statistics indicate that only a small fraction of HAMP modifications involve principal reductions.

“I think if Treasury got serious about strategic principal reduction, we could turn the corner on the foreclosure crisis,” White told Huffington Post. “For now, however, it’s crisis status quo; triple the normal level of foreclosures, with the resulting drag on home prices, the housing industry and the economy.”

BEATING HAMP

Critics of HAMP (see related item) have blamed mortgage servicers, in part, for the program’s shortcoming, claiming that they have not implemented the program quickly enough nor embraced it enthusiastically enough to make it successful. But lenders appear to be offering more attractive modification terms and helping more homeowners outside of the federal program.

Servicers have completed more than 800,000 modifications through the voluntary Hope Now Program, compared with a total of about 390,000 permanent modifications arranged to date under HAMP. Some consumer advocates say non-HAMP modifications often feature higher mortgage rates and fees borrowers don’t incur under the federal program. But analysts say many lenders offer comparable, or close to comparable, terms and considerably less red tape than borrowers encounter with HAMP.

A recent Moody’s report estimates that 2 million mortgages will be modified this year – 1.25 million of them outside of HAMP. And the report predicts that the re-default rate on those loans will be less than 25 percent over the next three years – much better than the modification results thus far.

“This is off the chart,” Mark Zandi, chief economist for Moody’s, told USA Today. “I don’t think there’s ever been anything like this before, with private servicers [arranging] their own modifications like this. Servicers have come to realize they have to reduce payments and [write-down] principal in a targeted way,” he added.

REVERSE MORTGAGE LOSSES

Poor monitoring of reverse mortgages under the federal HECM (Home Equity Conversion Mortgage) program and fuzzy guidance for participating lenders could cost HUD more than $3 billion this year, an audit by the department’s Inspector General (IG) has found.

The IG undertook the audit because of reports that an increasing number of reverse mortgage borrowers were failing to make their property tax and insurance payments, putting them in default of their mortgage terms. The review found that HUD had, for a long time, regularly deferred foreclosures on these loans to avoid displacing seniors. The agency notified lenders in April of last year that it was revoking that informal policy, but failed to provide guidance on how lenders were to handle these loans. As a result, the IG report says, servicers continued making the insurance and tax payments but did not notify HUD that the loans were in default. And HUD had no system for identifying the troubled loans.

The IG review of four servicers found that they were holding 13,000 defaulted loans on which they had made mortgage and insurance payments totaling $35 million. Although HUD had identified only about 7,000 deferred foreclosures, the report estimates that the number of deferrals increased by 173 percent from May 2009 to March 2010. “If this trend continues,” the IG said, “the number of deferred foreclosures…the amount of tax and insurance payments made by servicers and the corresponding risk to the [insurance fund] should be expected to similarly increase.

HUD officials have indicated that they are considering a number of measures to address the problem, among them, tightening HECM underwriting standards to ensure that borrowers have the capacity to make their mortgage and insurance payments, or requiring lenders to escrow the funds needed to cover those expenses at closing.

But those measures haven’t been implemented yet and won’t do anything to address the existing portfolio of deferred foreclosures, which could produce losses of nearly $3.7 billion, the IG report says. “It is imperative that HUD promptly issue guidance to servicers including directing them to foreclose, if necessary, to avoid payment of an additional $35 million in property taxes and insurance by servicers in the next year,” the report concluded. The IG also recommended that the agency “develop and implement a plan to minimize the risk of future defaults” resulting from nonpayment of insurance and axes, and develop a tracking and reporting system that can more effectively monitor deferred and defaulted loans and the sums servicers have paid to cover those expenses.

DEATH OF THE DREAM?

The “Great Recession” and the long, deep and continuing housing market decline that triggered it have brought many changes, not least among them, changes in attitudes toward home ownership. The “American dream” of owning one’s own home, long extolled as a cornerstone of the U.S. economy and of democracy itself, is being questioned more intensely than at any time in the past 50 years.

“Home ownership has let us down,” Barbara Kiviat wrote recently in Time magazine. “Foreclosures and walkaways, neighborhoods plagued by abandoned properties and plummeting home values” and the devastating decline in household wealth resulting from plummeting home values have made “the dark side of homeownership all too apparent,” she contended. “As the U.S. recovers from the biggest housing bust since the Great Depression,” she concluded, “it is time to rethink how realistic our expectations of homeownership are - and how much money we want to spend chasing them.”

Although Kiviat’s views are widely shared, there are still plenty of voices on the other side of this argument, unwilling to agree that homeownership has outlived, or undone, its usefulness. Economist Karl Case, co-founder of the closely watched Standard & Poor’s-Case/Shiller home price index, is among them.

There is no denying the seriousness of the housing market “catastrophe,” he agreed, in a recent New York Times op ed article; nor is there any question that those who believed that home prices would never fall have learned “a tough lesson.” But the notion that prices moved only in one direction was always a myth, Case wrote, and while the rude awakening, with its devastating impact on household wealth and the nation’s economy has been “depressing,” he said, it has not destroyed the dream of home ownership nor negated the value of owning one’s own home.

For those who view homeownership “realistically,” not as an income-producing investment, generating funds for paying bills or financing luxury purchases, but as “a solid and fairly safe long-term investment, coupled with the satisfaction of owning the house they live in,” the American dream isn’t dead,” Case wrote. “It‘s just taking a well-deserved rest.”

SPLIT DECISION

Financial industry executives who warned that consumers, when given the choice, would reject overdraft protection were half-right – about half (46 percent) of bank customers responding to an American Bankers Association (ABA) poll said they have elected to continue receiving overdraft protection on their debit card accounts and slightly more (49 percent) said they have opted out of that protection.

The ABA sponsored the survey to assess consumer reaction to the newly implemented federal rules requiring lenders to obtain permission from customers before offering overdraft protection the most used to provide automatically, often without the knowledge of their customers.

“Survey respondents were informed that banks can no longer charge a fee for covering overdrafts when they use a debit card unless the customer tells the bank in advance that they want overdraft protection and are willing to pay a fee for the service,” an ABA press release explained. “They were also informed that if they did not choose to opt in for overdraft protection, their transactions could be denied if their account was overdrawn.” Based on that explanation, survey respondents were about evenly divided between yes and no, with 5 percent uncertain.

“These results show that many bank customers value debit card overdraft protection and are willing to pay for the service,” Nessa Feddis, an ABA vice president , said, adding, “[customers] are now in the driver’s seat and control the way their accounts are managed.”

Although the new overdraft rules took effect only a few weeks ago, the Federal Deposit Insurance Corporation (FDIC) is considering tightening the rules for the 5000 community banks the agency oversees. The proposed regulations, issued for comment in August, would require financial institutions to:

  • Describe alternatives before offering overdraft protection to “frequent overdraft offenders”;
  • Contact customers with 6 or more overdrafts in a year and explain overdraft protection alternatives to them; and
  • Place an “appropriate” limit on overdraft fees, for example, by limiting either the size of the fees or the number of times they could be assessed.

“Many institutions have lived up to these guidelines [voluntarily], but we want to make sure the guidelines and our expectations are clear, Sandra Thompson, director of supervision and consumer protection for the FDIC, told the Washington Post.

The comment period on the proposed regulations ends September 27