OK, so HAMP was nowhere near as effective as hoped, but to blame any loan-modification program for “zombie homes” is just silly [“Zombie Homes,” Oct. 6, City Weekly].
As any serious person acknowledges, there are three fundamental reasons why there are more than 2 million homes in the foreclosure process right now, and another 4.2 million homeowners behind on their payments.
1. A lot of people paid too much for their homes and/or put very little down. Prices fell drastically, and now nearly 1 in 4 homes with mortgages are “underwater.”
2. The resulting shock to the economy left many people unemployed, and now they can’t make their mortgage payments, worsening the situation.
3. Some people bought their homes or refinanced during the boom into ARM loans that later adjusted to painfully high rates.
Loan modifications can help people in the last predicament. The first two, not so much.
If you are upside down, a loan mod program might help you if it provides incentives for lenders to make principal reductions. Lenders (especially second lenders) were slow to embrace that idea. They were more willing to reduce your interest rate, despite studies that showed borrowers given principal reductions were less likely to default.
What can a loan-modification program do for you if you’ve lost your job? Provide reduced payments until your unemployment benefits run out—if your lender is willing to cut you some slack even though you don’t have a job and may just end up redefaulting. Many aren’t.
Nevertheless, HAMP got nearly 1.7 million trial loan modifications started, and loan servicers approved 817,000 permanent HAMP loan mods. Granted, only about 700,000 of homeowners who got permanent mods are still current, but that’s 700,000 non-zombie homes still occupied by their owners.
Here’s another stat you don’t see very often. What happened to those 765,000 homeowners who were in trial HAMP modifications that were cancelled? Forty percent ended up in a non-HAMP loan mod, and nearly 10 percent got current on their loans. Only 15 percent are currently in foreclosure, and only 8 percent have been pushed all the way through the foreclosure process. For HAMP to have helped more borrowers, it would have had to carry a much bigger price tag, either for taxpayers or private investors in mortgage-backed securities (MBS).
The Congressional Budget Office (CBO) has estimated that one plan currently being pondered—letting 3 million underwater homeowners refinance at today’s low mortgage rates—would prevent about 111,000 foreclosures, at a cost to $13 billion to $15 billion for private MBS investors. The government would also lose $4.5 billion on mortgage-backed securities it holds, but would recoup most of that money ($3.9 billion) due to the reduction in defaults, leaving taxpayers to foot the remaining $600 million in costs, according to the CBO.
Now, you could argue—as opponents of government interference in markets have—that HAMP has done more harm than good because it’s slowed down a needed housing-market correction. Those who hold this view think lenders should push delinquent borrowers through the foreclosure process as quickly as possible, because the “shadow inventory” of distressed homes is holding back a recovery. But to suggest that HAMP has created more foreclosures than it’s prevented is to ignore statistics demonstrating that HAMP and loan-modification programs in general have had a stabilizing effect on housing markets by keeping people in their homes.
A recent study by economists at the Federal Reserve Bank of Cleveland found that the negative impact of individual foreclosures on sales prices of neighboring homes is about 2 percent if the home is neither vacant nor delinquent. If back taxes are owed on the home, or if the home is vacant, foreclosed homes can reduce nearby property prices by 7 percent to 8 percent.