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Home Publications Blogs Beat the Press Money for Failed Modifications Goes to Banks, Not Homeowners

Money for Failed Modifications Goes to Banks, Not Homeowners

Thursday, 15 April 2010 07:11

The NYT reported on the release of new data from the Treasury Department showing a doubling in the number of redefaults on loans that had been permanently modified through the administration's HAMP program. The new data show that more than 1 percent of permanent modifications have already redefaulted. Since most of the modifications have only been completed in the last few months, this indicates that a very percentage of the permanent modifications are likely to end in default. Since the vast majority of homeowners facing foreclosure will not receive a permanent modification, these means that the program is likely to help only a small minority of homeonwers keep their home.

It would have been useful to point out that the money that the government spends on a failed modification goes to banks, not homeowners. Typically, the government will have subsitituted an FHA insured mortgage for the original mortgage issued by a bank. This means that when a redefault takes place, the bank will have received most of the principle back on the loan, with the government incurring the loss on the redefault. The net result of this policy is that far more money is likely to be given to banks through the HAMP than to homeowners. This should have been pointed out in this article.


--Dean Baker

Comments (10)Add Comment
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written by AndrewDover, April 15, 2010 10:29
A word is missing from "a very percentage of the permanent modifications are likely to end in default."

Since "overall re-default rates remain high with more than half of all modifications falling 60 or more days past due by 9 months after modification", is the word "high" ?

written by Queen of Sheba, April 15, 2010 1:00
It's a miracle more people in this country aren't mentally ill from the cognitive dissonance that comes from watching teevee news. Today the stories on the economy filling the air, often back-to-back, are, first, how well the recovery is going and, next, how foreclosures are skyrocketing. Then viewers are treated to pictures of tea party protesters raving about taxes and Obama and Congress when they all had their taxes reduced this year courtesy of Obama and Congress. Maybe we're all deranged this April 15th, but we just recognize the condition in other people.
written by BillB, April 15, 2010 3:16
Even worse, the program keeps people in houses they can't afford and that they will eventually lose anyway. Meanwhile the banks get to collect payments for a little while longer, they get to defer foreclosure for a while longer, and the homeowners just get poorer.
written by James, April 16, 2010 2:30
Dean either purposely left out or didn't know that the bank has to write down or charge off a portion of the mortgage in order for that loan to be modified. The bank takes that loss into earnings.
Not so sure how many more defaults there will be.
written by Aditya Savara, April 16, 2010 5:33
"The new data show that more than 1 percent of permanent modifications have already redefaulted." [after only a few months]

If it is only 1 percent after a few months, I personally think that is not so bad. Of course the program will weed out the bad apples early on -- so in my view, this actually means they have been doing a good job in picking who qualifies.

Additionally, if the economy is really going to pick up, then the number of bad apples will decrease from that too. And the whole point was to mitigate the stress on the economy/people -- so if we only have a few percent defaulting per year for the next 5 years (rather than 30% defaulting of these guys defaulting now, and 100% by the end of the year), then the program is still doing its job.

Dean should have mentioned this in his post :)
written by Jayne, April 20, 2010 1:37
I've been reading about HAMP and HARP for close to a year and I have yet to find a bank (other than a few of the biggest) that were even offering the refinance portion of the Make Home Affordable Program. Most of what I have read indicates the program was a failure. It's main failure was the refusal of most banks to offer the program at all. The number of modifications made were paltry compared with the number of people in trouble with their mortgages. Our personal experience was that we qualified for the refinance portion of the program. Our home is not and was not under water. But our servicer, who was listed with the Dept of Treasury as a bank that was contracted with Fannie Mae and Freddie Mac to administer these loans, claimed they were not contracted. Fannie Mae officials claimed they 'did not have a list of lenders'. Then there are the people who were given constant runarounds by their lenders and servicers (lost papers, wrong papers, ad nauseum), when all the while their lenders/servicers were taking the steps to foreclose and succeeded in doing so. Fortunately, we are in a position to avoid what so many people have not, despite the way this program was handled - very poorly and perhaps intentionally so.
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.