If You Institute a New Program and it Turns Out to Be a Flop, What Do You Do?

If you’re the Federal Government, you can do one of two things:

* Expand it and spend more money
* Do away with it

    In the case of the failed HAMP (Home Affordable Modification) program, it appears that they’re trying to do both.

    Expand it: Under the terms of the Frank-Dodd act, a new regulation is requiring loan servicers to tell homeowners in writing why they’ve been turned down for a loan modification. But the guidelines don’t cover all loans, so you may or may not get a letter if you’re turned down.

    After being rejected and told why, homeowners have 30 days to file an appeal and provide written proof that some of the data used in the decision was wrong. Then the servicer has the choice of taking a second look at the request or rejecting it again.

    Part two of that regulation is the creation of a new government website where homeowners will be able to input their own information to see if they might be eligible for loan modification under HAMP guidelines. The website is scheduled to be ready by late Spring.

    Do away with it: Meanwhile, the House Financial Services Committee voted on March 9 to do away with the HAMP program entirely. The proposal has now gone to the full House of Representatives for consideration, and of course there are proponents and critics on both sides of the issue.

    Treasury Secretary Geithner testified on March 8, saying that elimination of HAMP would “cause a huge amount of damage” to the housing market.

    However, an October 2010 report from the Special Inspector General for the Troubled Asset Relief Program asserted that failed loan modifications have hurt consumers. The report noted that they’ve led to higher outstanding principal balances and destroyed credit ratings for troubled borrowers. No doubt that those troubled borrowers would agree.

    Perhaps the new website will be ready just in time for the program to shut down?

    Why did HAMP fail?

    Why, when the program was expected to help between 3 and 4 million homeowners avoid foreclosure within its first 6 months, has it now helped only 600,000 – after nearly 2 years?

    The most likely reason is that the participation by the banks was voluntary. In addition, those who did participate didn’t have to follow any guidelines in deciding whether to start – or finish – a loan modification.

    Guidelines do exist in the form of a NPV – a “Net present value” test that determines whether a loan modification makes financial sense for the lender. If a loan meets both that test, and the bank’s own proprietary loan modification guidelines, the servicer must offer the borrower a trial modification.

    However, as far too many homeowners have learned, they don’t have to make it permanent.

    Apparently because this is all voluntary on the part of the banks, there are no enforcement mechanisms and no penalties for failure to follow the HAMP guidelines.

    The new website is no different. It will offer only the official HAMP guidelines, so passing that test will not be a guarantee of being accepted for a loan modification.

    Apparently, the primary benefit to the new regulations is to remove some of the mystery – so homeowners will have a clue about why they didn’t get a loan modification.


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