After an eight-year run, a troubled government effort to keep struggling borrowers in their homes has come to an end. What happens next will be an experiment in how financial-services companies conduct themselves when the regulatory fetters are loosened.
After an eight-year run, a troubled government effort to prevent foreclosures and keep struggling borrowers in their homes came to an end last month.
What happens next will be a Trump-era experiment in how financial-services companies behave when the regulatory fetters are loosened.
The expired Obama-era program — known as HAMP, the Home Affordable Modification Program — was widely criticized for its poor execution.
Participation was voluntary for banks, and many that opted in did so unenthusiastically. (At one bank, “the floor of the room in which the bank dumped the voluminous unopened HAMP applications actually buckled under the packages’ sheer weight,” according to a scathing oversight report.)
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Consumer advocates were also not thrilled; many thought the program did not go far enough to help troubled homeowners or hold accountable the banks that contributed to their predicaments.
But Republican-led Washington has no intention of replacing it. So now it will be entirely up to the private sector to address a lingering social ill that was brought on by the financial crisis.
Banks and mortgage lenders say they are ready to step in with their own foreclosure-prevention programs, modeled on what they learned from the Obama administration’s effort. Armed with years of new data, financial companies say they now know how to make loan-modification programs successful, for both borrowers — who want to protect their homes — and lenders, who want to limit their losses on delinquent loans headed for default.
“There’s tremendous public good in having an industrywide approach,” said Justin Wiseman, the director of loan-administration policy at the Mortgage Bankers Association, a trade group. “No one wants things to revert to what we had before.”
Still, housing advocates are skeptical, and for good reason: The mortgage industry was largely responsible for HAMP’s shortcomings (as well as for creating the need for the program in the first place). The business has long been littered with errors, confusion and outright abuses.
President Obama unveiled HAMP with fanfare in 2009 as the mortgage crisis peaked. More than 7 percent of the nation’s home loans were seriously delinquent or in foreclosure. “This will enable as many as 3 to 4 million homeowners to modify the terms of their mortgages to avoid foreclosure,” Obama said at the time.
But the program fell far short of the administration’s goals.
Banks and servicers routinely flouted the rules by rejecting eligible homeowners, processing applications at a snail’s pace and tossing people out even when they made their modified payments on time, according to audit reports from the program’s watchdog, the office of the special inspector general for the Troubled Asset Relief Program.
Around 70 percent of those who applied for loan modifications were turned down. In the end, some 1.6 million homeowners had their loans permanently modified — less than half the number the program was intended to help.
Meanwhile, nearly 14 million homes went into foreclosure, according to ATTOM Data Solutions, which tracks foreclosure filings.
At the end of last month, HAMP expired. It was always intended to be a limited-time program. And the mortgage industry, and even some consumer advocates, say now is the right time for the government to step away.
The housing market has stabilized. The rate of delinquencies and foreclosures is at its lowest point since 2007 and continues to decline, and home prices have risen in many places. New lending rules have eliminated many of the practices that got homeowners and lenders in trouble, like no-documentation loans and mortgages with low teaser rates.
But even in a stronger market, there will always be some homeowners in trouble because of a job loss, illness or other setback. Before 2009, few banks had programs in place to restructure loans.
Through HAMP and other experiments, lenders say, they have learned much about how to make such efforts work. “Payment reduction, more than anything else, matters the most in making a modification successful,” said Wiseman of the Mortgage Bankers Association. “It sounds like the most obvious thing in the world, but it took us six years of data and research to get there.”
The trade group convened a task force last year to develop a framework for future modifications. The proposal they came up with looks a lot like HAMP, with one key difference: its monthly payment target.
The government’s program focused on housing debt as a percentage of a homeowner’s total income. Its goal was to set a borrower’s monthly mortgage costs at 31 percent or less of their earnings.
The industry’s recommended new system instead emphasizes payment reduction. It targets a drop of at least 20 percent in the homeowner’s monthly bill through a series of steps that include interest-rate reductions, adding years to the life of the loan, and principal forbearance or forgiveness.
Two of the nation’s largest mortgage holders, Fannie Mae and Freddie Mac, adopted that end goal — a 20 percent payment reduction — for their new foreclosure-prevention program, which will take effect in October. (Both have other modification programs in place until then.)
A number of major banks are also on board. JPMorgan Chase will adopt the “core constructs” of the mortgage banking group’s proposal.
“I think there’s a broad consensus across the industry that standardization and scalability helps everyone,” said Erik Schmitt, JPMorgan Chase’s executive director of mortgage lending, who was co-chairman of the banking association’s task force.
For lenders, getting a delinquent borrower paying again on a modified mortgage is often (but not always) cheaper than foreclosing on the home and selling it.
But that is not necessarily true for mortgage servicers. which collect payments each month and are sometimes independent from the loan’s underlying owner. Chasing down late payments, and tacking on fees for them, can be lucrative. Regulators have penalized companies again and again, levying billions of dollars in fines on lenders and servicers accused of illegal and abusive tactics.
Just last week, the Consumer Financial Protection Bureau fined two Citigroup subsidiaries nearly $29 million for “giving the runaround” to borrowers seeking payment relief. (Citigroup said in a written statement that it was “pleased to resolve these matters.”)
That has left consumer advocates wary about whether, in the absence of a government program like HAMP, industry players can be trusted.
Homeowners like Justina Osorio, a 40-year-old single mother in Columbus, Ohio, who is fighting to save her house, have a lot riding on the answer.
Osorio bought her home in 1999 for around $110,000, and she and her husband raised four children there. But in 2014 the couple separated, and Osorio, who was unemployed at the time, fell behind on her $790 monthly payment. She and her children, now ages 7 to 23, feared they would become homeless.
A worker at the local food bank referred Osorio to Homes on the Hill, a housing counseling agency. The group started helping her with a HAMP application in January 2016. In late December, it was finally approved, making Osorio one of the program’s final participants.
Based on the monthly income of her sons — one is a cook, and two are in landscaping and construction — the family’s new monthly bill is $736. If Osorio makes three trial payments on time, her arrears will be folded into a new loan.
Her housing counselor, Daniel Ruggiero, said HAMP was far from perfect, but that the modification process was typically even slower and more obstacle filled at lenders that did not participate in the voluntary program. He is leery of what comes next.
“My biggest concern is whether servicers will keep following guidelines, and not just throw all this out the window and go back to the mess it was before,” Ruggiero said. “I imagine two or three will do it really well, others will muddle through, and some will simply go back to, ‘We’re not doing modifications.’”