The Obama administration and Congress have largely failed the American people in providing relief from the ongoing mortgage crisis. The Obama administration's first response to the affects of the mortgage crisis on consumers was to create the Home Affordable Modification Program (HAMP). This program has been, by most accounts, an abysmal failure. There are many reasons for this.
From a purely economic perspective, many people with homes in foreclosure simply have no incentive to attempt to salvage the loan, because the value of their home is less than their mortgage. Secondly, the banks have simply opted to not meaningfully participate in the program. There is no private right of action if you are damaged by a bank's failure to adhere to its obligations under HAMP, although several lawsuits, like this one, have been filed in various jurisdictions alleging that the contract between Fannie Mae and the banks for TARP Money creates rights which can be enforced for individuals in court.
It is clear that HAMP is broken, but it isn't clear that it is worth fixing. To that end, the Obama administration has proposed HAFA, the Home Affordable Foreclosure Alternatives program. This program is specifically geared towards facilitating short sales and deed in lieu of foreclosures. A short sale is when the bank agrees to take less than it is owed to satisfy a mortgage in exchange for the homeowner actually selling the property. A deed in lieu is similar, except that the bank simply agrees to accept the house and cancel the debt.
This is most likely going to fall victim to the same problems as the HAMP programs. First of all, a deed in lieu of foreclosure is extremely disadvantageous to the banks at this point, because they already have foreclosed on too much property, and don't want any more, and so they will try to avoid doing this, regardless of a federal mandate. Along those same lines, it is basically HAMP redux insofar as it does not create any incentive for participating banks and servicers to actually adhere to the rules of the program. Finally, consumers have much better options for strategic default on their mortgage than the government can offer.
If the government wants the banks to actually help consumers with underwater loans, they will need to actually force the banks to do so. There is no political will for this, though. Therefore, it is incumbent upon the consumers themselves to fix the problem.
Besides the banks' problem of OREOs (Other Real Estate Owned) from foreclosures, usually they are forced to recognize losses if they actually complete a foreclosure or short sale (and presumably a title in lieu of the debt). The foreclosure process (with the long time between default and actual foreclosure) lets them pretend that the loan is still worth the face value.
ReplyDeleteAs you mention, the homeowner being underwater limits their incentive to want to try to modify the loan to become current on it again. A prolonged foreclosure is their best bet except for the speed with which the foreclosure happens once the bank decides to sell (i.e. they get a short notice to vacate), but that can happen 12-18 months after they stop paying.
A program that would actually deal with the issue wold be to force the banks to take a principal writedown on the debt and give the bank a portion or all of the appreciation on the house, essentially allowing the owners to stay in the house as renters unless the value returns to pre-recession prices and they are able to pay the original value of the mortgage. That way, the bank s not forced to sell into a bad market, the homeowner can still live in the house and the banks will eventually get to write the value of the loan up as markets recover.
Thanks for the comment, Blake. This is an excellent point regarding the incentives for the banks to take an ostrich approach to the mortgage crisis.
ReplyDeleteYour proposed solution is a good one, but I think that the ship has sailed for getting the banks on board with any kind of real plan. The government's maximum leverage was when they were writing big checks with TARP money and saving the banks. Now that they've done that without getting any real concessions in return, it is going to be hard to get the banks to cooperate with any plan.
Part of the problem also needs to be looked at from the standpoint of the Banks as well. If a consumer is able to make payments but unwilling to do so because their equity position has decreased this is also a huge issue. In other words, the consumer is ultimately the one that is in breach of contract - not the Bank.
ReplyDeleteI know first hand that the majority of the issues that have happened with consumers not being able to keep their homes has been from job/income loss. This is certainly legitimate. But Banks alone are not the only ones that are morally bankrupt. The reference to a "strategic default" is case in point.
Why should the Bank write down a mortgage? Are you speaking purely from frustration that Banks were given TARP money and have not done enough to in turn help consumers? In other words, if the situation were reversed and homeowner's were gaining equity in their properties there would be considerable outrage if the consumer were to be forced to give a portion of that equity to the Bank that gave them a loan. And yet, that is what we are asking the Banks to do - the consumer purchased a home, the home went down in value and now we are asking the Banks to pay the difference between current value and current principal or something along those lines.
At the same time, admittedly, the whole situation is a complete mess. I don't have a solution that I can offer but I don't think that it's right to indicate the whole catastrophe with modifications is purely the fault of the Banks. Modifications themselves are not necessarily in the best interest of the Banks and with roughly 50% of them failing even when approved, I don't know that modifications themselves are the answer.
More than likely, we are ultimately going to see these same homeowners lose their homes whether we like it or not. My favorite analogy is that consumers are like a man jumping off a building - the government's efforts are the equivalent of someone just lowering the sidewalk. Ultimately, we're going to hit the bottom no matter what. Modifications will likely just stall the inevitable.
Thanks for the comment, Mark. My point is actually that, morality aside, there has to be a better solution for both banks and consumers in this crisis.
ReplyDeleteYour point is well taken, though. There are a lot of mortgages which are simply unsalvageable. Obviously modification is not the answer to these loans, the question is, what is the best outcome for both consumers and banks in these situations.
Again, thanks for reading.