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Treasury Announces New HAMP Changes With Greater Eligibility, More Principal Reduction Incentives

Hey, remember HAMP? That’s the program that was supposed to help four million borrowers lower their mortgage payments and avoid foreclosure? The one that promised $50 billion for that purpose? The one that’s actually provided temporary relief for around 900,000 borrowers, used about 6% of the money earmarked, and also the one that’s been used by the banks as a predatory lending program to trap desperate borrowers and force them into foreclosure or massive late fee payments? That one?

Yeah, Treasury got around to fixing it.

In a move announced today, the Treasury Department made some significant changes to HAMP which will extend the program by one year, encourage principal reductions for GSE and non-GSE loans, and expand eligibility. But it’s not clear whether borrowers who have seen or heard about abuses through HAMP will want to trust the program again.

First, to the details. Timothy Massad, who has handled HAMP at Treasury, made the announcement in a press release (which still weirdly tries to take credit for private loan modifications made by the banks outside of HAMP). The highlights include:

• Extension of HAMP into 2013. HAMP was actually set to expire for new trial modifications at the end of the year, but today’s announcement extends it to the end of 2013. HARP, the newly-tweaked refinancing program, also has authority through 2013. This means that the bulk of the money left in HAMP accounts can actually get used.

• Expanding eligibility. New borrowers not previously eligible under HAMP would get to participate under the new rules. Borrowers with second liens or additional financial exposure (like medical bills), for example, will have the chance to enter HAMP for another evaluation with what is called “more flexible debt-to-income criteria to expand modification assistance to borrowers with higher levels of secondary debt.” In addition, properties intended for rental will be able to get eligibility for HAMP, which could help renters who have to move from a foreclosed property through no fault of their own.

• New principal reduction enhancements. There have been barely any principal reductions given through HAMP even though these are usually the most durable types of loan modifications. Under the new plan, Treasury will triple the incentive payments for “investors who agree to reduce principal for borrowers.” Also, there will be principal reduction incentives for GSE-owned or guaranteed loans. This is new; the GSEs’ regulator, the FHFA, has resisted principal reduction at every step. To mitigate FHFA’s concerns about losing taxpayer money in the deal Treasury will “pay principal reduction incentives to Fannie Mae or Freddie Mac if they allow servicers to forgive principal in conjunction with a HAMP modification.”

At first glance, these all seem like decent steps. But there’s a problem. People hate HAMP. They have either been stung by it themselves or they know someone who has. For close to three years Treasury did not sanction a single servicer for noncompliance and they’re only now getting around to it. This means that there are literally hundreds of thousands of horror-show stories about HAMP, with lost documents, surprise foreclosures happening on a dual track, bad information and advice, and other terrible actions all features of the program. HAMP has become synonymous with corruption and failure.

These new tweaks, however good they are, cannot reverse that history. They will not be able to entice people back to a program that has such a poor image. The numbers for HAMP in the last six months show a significant drop-off in the program and I don’t know if that can be reversed.

It’s Treasury’s own fault for failing to manage a horrendous program until years too late. Of course their priority has been less about troubled borrowers and more about propping up troubled banks.

UPDATE: Rich Trumka of the AFL-CIO is out with a strong statement of support for these changes. I’ll put that on the flip. To believe this will work, you have to believe that not only borrowers burned by HAMP will give it another chance, but also that banks and servicers will be motivated by the incentive payments more than all the incentives that flow in the other direction (like keeping worthless loans on their books and pretending they have value, for instance, or the servicer financial incentives to foreclose).

Trumka’s statement:

We welcome the President’s announcement today of changes to the Home Affordable Modification Program (HAMP) that will encourage principal reduction in mortgages held by underwater homeowners victimized by the big banks that caused the housing bubble. Homeowners at the end of their rope due to an economic collapse caused by bankers epitomize the struggles of the 99% that must be at the center of both our political discourse and our policy actions, and today’s announcement is a big step in that direction.

Most importantly, if the Federal Housing Finance Agency (FHFA, an independent federal agency) abides by the basic economic math of this initiative, offering the principal reduction alternatives to GSE-backed mortgages under HAMP will provide help to far more homeowners facing foreclosure than before.

This initiative shows that President Obama’s strong language on the foreclosure crisis and holding bankers accountable during his State of the Union speech is more than mere rhetoric. The expansion of principal reduction alternatives to foreclosure complements the President’s new working group of state and federal officials who are investigating bank wrongdoing in mortgage backed securities. Homeowners who have been harmed by fraudulent bank practices must receive real relief in the form of meaningful principal reduction on their mortgages.

The bursting of the housing bubble has hurt homeowners far more than the banks that caused the foreclosure crisis. Fixing housing is key to fixing the economy – principal reduction must be on a scale sufficient to address the $750 billion in negative home equity that exists in America. This will lift home values for all homeowners and stimulate the economy by increasing consumer demand. Today’s announcement is another important step to addressing a problem of enormous magnitude.

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David Dayen

David Dayen