Many Freddie Mac HAMP Modifications End Up in Foreclosure

I am hopeful* that one of these days I will be able to write a story about the stunning success of a government sponsored mortgage modification program. Today is not that day.

*Hopeful is probably not the right word.  I see precious little evidence that our elected officials can or will pass any sort of useful legislation to forestall foreclosures unless they fall backwards into it.

I have hammered on government mortgage modification programs in this space over the last several months.  I believe they have been expensive, poorly-designed, and largely ineffectual.  The Home Affordable Modification Program (HAMP) is the most prominent of these programs and thus receives the most criticism.

I am not the only one who is down on HAMP.  The Special Inspector General for the Troubled Asset Relief Fund (SIGTARP), Neil Barofsky, released his quarterly report on TARP for Congress at the end of October, and he blasted HAMP for falling “woefully short” of its goal of preserving homeownership.  He also accused HAMP of offering “little more than false hope” for many borrowers.

Following on the heels of SIGTARP’s criticism of HAMP, The Congressional Oversight Panel released a report further damning the program, saying: “To date fewer than half a million homeowners have received permanent mortgage modifications through Treasury’s program, and as many as half of these borrowers will ultimately redefault and lose their homes”.

Now there is a report from Freddie Mac via Housingwire that shows 42 percent of the modifications Freddie Mac did during the second quarter of 2009 (a paltry 16,000) redefaulted within 12 months of the modification.  In fairness, only 29 percent of modifications from the third quarter of 2009 ended up re-defaulting.  The article says that Freddie Mac has completed 121,000 HAMP modifications since the program began.

It is apparent that HAMP is not helping the vast majority of people who need assistance.  According to data from Lender Processing Services, there are currently 4.3 million mortgages that are seriously delinquent or in foreclosure.  REO inventory is at all-time highs.  Still HAMP has only done about a half million modifications.  Many of these people will end up redefaulting.  This is particularly upsetting, because it means many of those who have been “helped” by HAMP would have likely been better off just defaulting and moving on without even attempting a modification.

The fundamental problem is that this program (and others) provides neither a carrot nor a stick that will incent banks to write down loans.  Servicing fee structures are often set up in such a way that a drawn out foreclosure is more profitable than a principal write down. Until somebody comes up with a program that addresses this fundamental issue, the foreclosures will continue.