The average beneficiary of the Obama administration's flagship homeowner-assistance program owes their mortgage lender more than $1.50 for every dollar their home is worth, which means they fall into the stratum of homeowners most likely to simply walk away from their mortgages, recent government data show.
This little-noticed statistic was disclosed in a June 24 report by the Government Accountability Office. Citing government data collected through mid-April, the report found that even homeowners who receive lower monthly payments through the administration's Home Affordable Modification Program are still struggling "under water," meaning they owe more on their mortgages than their homes are worth.
A recent study by Federal Reserve economists shows that underwater homeowners are, not surprisingly, much more likely to default on their mortgages. Moreover, borrowers who are deeply underwater -- like those in HAMP, who average negative 50 percent home equity -- are far more likely to default willingly; that is, to give up on trying to overcome their growing mountains of debt, and just stop paying at all.
This revelation underscores the problems with the path taken by the Treasury Department to help homeowners, who merited federal attention only after the government gifted Wall Street banks with hundreds of billions of taxpayer dollars to survive a financial meltdown largely of their own making. Rather than designing a program exclusively focused on homeowners, the administration chose to set up an initiative that seeks to balance the needs of homeowners with the interests of lenders and investors.
Thus, while the average homeowner in the program is saving more than $500 a month, 28 percent more homeowners have been bounced from the program than have been helped. Homeowners that receive permanent reductions in their monthly mortgage payments end up deeper underwater than they were before they were "helped." Meanwhile, lenders and investors continue to foreclose on properties at a record pace.
On Tuesday two top Republicans released a Thursday letter to Treasury Secretary Timothy Geithner calling for the administration to "immediately" end HAMP.
"It defies common sense that taxpayer money is being used to pay banks to modify loans that are likely to default anyway," said Rep. Darrell Issa (Calif.), the ranking Republican on the House Committee on Oversight and Government Reform. "In cases where loan changes could keep borrowers out of foreclosure, banks have a clear incentive to make changes without a need for public funds."
They don't necessarily have an incentive to help homeowners, however. Consumer advocates like Diane E. Thompson, a lawyer with the National Consumer Law Center, said part of the reason the average HAMP homeowner is so deeply underwater is that underwater homeowners are more likely to get a loan modification approved than less-desperate borrowers with positive equity in their homes.
That's because of the test that mortgage servicers run to determine whether homeowners qualify for the program. Called the "net present value" test, it essentially tells lenders and investors whether they'll make more money foreclosing on the home or modifying the borrower's mortgage. This profit motive determines whether distressed borrowers will keep their homes or be kicked to the curb.
The test "favors homeowners who are underwater," Thompson said. "The less equity you have in the house, the more likely you'll pass the NPV test."
"One of the real failures of HAMP" is its inability to help the "little old lady who's lived in her house for 30 years," Thompson added.
If some disaster struck and she's looking for a mortgage modification, she's unlikely to qualify for the administration's program because she'll have too much equity in her home. Her lender or the investors who own her mortgage would make more money of a foreclosure than by simply reducing her monthly payments, Thompson said.
"It's insidious," she added. "It really illustrates how the NPV test is not about helping homeowners. It's purely driven by what is going to help the investors the most."
Still, Thompson stopped short of Issa's call to kill the program. While Issa and fellow Republican Rep. Jim Jordan of Ohio are "certainly not alone" in demanding that HAMP be ended, Thompson said that "while HAMP has been a disappointment, I'd rather see the program improved than scrapped."
"HAMP is relatively cost-effective," Thompson said. "It's not going to have the large macro impact we had hoped for, but scrapping HAMP doesn't mean we'll have fewer people being foreclosed on." Ending the program, she said, "doesn't do anything to rebuild our communities."
And while Issa and Jordan argued that homeowners and taxpayers would be better off in private modification programs, Thompson disagreed.
"Homeowners would be worse off in 90 percent of the circumstances," she said.
More than 16 months after President Barack Obama told a crowd in Mesa, Ariz., of his plan to help up to 4 million Americans avoid foreclosure through restructured mortgages, many of the homeowners who weren't simply booted from HAMP have indeed benefited from the program. Treasury data through May show that the median HAMP homeowner's monthly payments fell by about 41 percent, meaning that half the homeowners saw a bigger drop than 41 percent while half experienced a smaller decrease.
But only about 340,000 homeowners have received permanent relief from HAMP -- a far cry from 4 million -- while nearly 436,000 homeowners have been expelled from the program.
The Fed study found that about 20 percent of defaults by underwater homeowners, and fully half of those with negative equity greater than 50 percent, were strategic defaults driven by their underwater status. In other words, these homeowners looked at their income and expected losses, then decided that it was better to abandon the mortgage than to keep throwing good money after bad.
The government has taken notice. "We agree negative equity is an issue," a Treasury Department spokesman said. "And that is why we have announced the principal reduction alternative as part of HAMP, and FHA refinance adjustments to help underwater borrowers."
These plans -- cutting the total cost of some HAMP homeowners' mortgages and allowing others to refinance into a taxpayer-backed mortgage that's more closely aligned with the current value of their home -- are just beginning to launch, though, and are expected to take months to get off the ground.
Hui Shan, one of the three Fed economists behind the default study, cautioned that it may be difficult to apply its conclusions to HAMP homeowners because borrowers in the administration's mortgage program benefit from lower monthly payments, reducing the incentive to simply walk away from their home in favor of a rental at a comparable price.
However, as Thompson noted, "by its nature, HAMP is going to increase debt" as mortgage servicers add delinquent payments and associated fees to the back end of the mortgage.
A recent report by federal bank regulators showed that three months after their mortgages were modified, HAMP borrowers had a lower delinquency rate than those who modified their loans in other, non-government programs. But the key -- and the administration has yet to release any statistics on this -- will be whether that trend continues six, nine and 12 months out. Until then, Treasury is forced to defend a program critics are already writing off.