The Treasury's defense of HAMP
My column this morning was not kind toward the Home Affordable Modification Program, or HAMP. When officials from Treasury called to press their case, I suggested a Q&A format so that you all could hear their argument. The participants were Phyllis Caldwell, chief of the Treasury Homeownership Preservation Office; Tim Massad, acting treasury assistant secretary for financial stability; Steve Adamske, treasury deputy assistant secretary for public affairs; and Mark Paustenbach, treasury spokesman. An edited transcript follows.
Ezra Klein: The conventional wisdom is that HAMP failed. It helped many fewer people than we’d projected, spent barely any of its money, and ended up converting fairly few of the trial mortgage modifications into permanent modifications. Is any of that wrong?
Phyllis Caldwell: You have to think about HAMP in the context of who it was supposed to help and why. It set a framework for evaluating mortgage modifications that moved the industry to a standard modification able to reduce payments and gave more than a million homeowners immediate relief through trial modifications that had the potential to become permanent. So what it set out to do worked. What has been disappointing were the number of people who qualified for modifications. Some of them were not who the program was meant to serve. They were already paying less than 31 percent of income on their mortgage or they could not verify the income they said they had or they could not keep up with payments during the trial period.
That implies that the problem was that your view of the housing market was too optimistic when we created the program, and HAMP’s underperformance is a function of homeowners being in worse shape than you’d thought?
PC: I wouldn’t say a more optimistic view. If you think about when HAMP was started, the issue facing the mortgage market was a reset of subprime loans where many homeowners would experience huge rate shocks that would make their homes unaffordable. HAMP was set up to look at those payments, have a standard way to restructure those mortgages and make them more affordable.
Steve Adamske: Remember that some of these people were legitimate victims of predatory lending. It was in part designed to help people duped into mortgages that were going to reset at much higher rates and to try to correct that problem at some level. But the longer we’re going along here, the problem we’re finding with foreclosures is unemployment, which HAMP can’t address.
PC: Right. And only part of the strategy for blunting the pain of resets was HAMP. It was also the decrease in interest rates over all which kept the resets from being so bad. But now the problem has moved to being unemployment and negative equity, and that’s not what HAMP was set up to address.
Run me through the numbers here. How many people did HAMP reach?
PC: There’ve been roughly 1.3 million trial modifications. You have to remember that up until June of 2010, folks could open into a trial modification by simply calling up and asking for it. After June, we began checking their incomes before they entered the program. There have been about 460,000 permanent modifications.
A criticism of HAMP is that its three-month trial period ended up hurting a lot of people. They got their payments lowered for a few months and then their bank just left them hanging, or they got kicked out, and now they had to pay the difference, or they’d been holding on in a community with no jobs for longer than they needed to.
PC: There are instances of that. It’s important to remember that the focus was for people who wanted to stay in their homes and there may have been some cases where people believed or hoped that their circumstances would change and so they stayed in the trial hoping their circumstances would change but they didn’t. But it’s not fair to say they are worse off than they were because of HAMP. They owed what they would’ve owed anyway.
In some sense, your defense of HAMP seems to be that, well, the situation was worse than we thought. So are there further programs or changes you wish you’d made?
PC: As we go through the year on HAMP, you have to go back to where we were at the time. It has taken a long time for the entire industry to adjust to the huge need for mortgage modifications. But every change we’ve made in making the program better is met with an argument that it’s changing so fast we can’t keep up with it.
SA: There’s a moral hazard in this issue as well. Your editors and people in your industry would be salivating for the Lexus owning and beachfront property types who would get help if we opened the program further. We have to go for a middle ground where we get the people deserving of help so there’s no accusation of free lunches. The challenge is figuring out how to scale a program so you’re doing enough and trying to address the problem without doing so much that you create a big moral hazard problem and use taxpayer money unwisely. That’s why we only paid out funds when there was success. That helped us be responsible. So we still think it was properly designed, given the need to scale it in that way.
Was HAMP too friendly to the banks? Why not empower the housing counselors rather than letting the mortgage-holders sign up for this program voluntarily?
PC: When we talk about HAMP or mortgage modification, it’s important to know that only 15 percent are owned by banks. The rest are Fannie, Freddie and investors. People see it as the banks not modifying, but it’s really banks and servicers working on behalf of investors. And then we need to include the effect HAMP has had on the industry in creating a model for reducing payments on mortgages. Before HAMP, only a third of modifications were reducing payments. Now it’s above 70 percent.
Mark Paustenbach: And you know why the program was voluntary, right? We didn’t have the authority to unilaterally open up these contracts and change them. That would’ve been illegal. So we needed a program where we could get the servicers to participate and agree to do the modifications voluntarily.
SA: When you talk about forced bankruptcy modifications [like cramdown], it failed in Congress. It wasn’t politically feasible.
But didn’t HAMP need the stick of forced modifications to work?
PC: Remember that private mortgage modification has changed a lot in part because of HAMP. It set a framework for that. Within the HAMP program, over 1.3 million have had a chance at modification. But when you look beyond HAMP at the private mortgage modification industry, modifications continue to exceed foreclosure sales on a 2:1 basis. Modifications have worked. But they can’t stop foreclosures totally because there are some people for whom it’s not avoidable. So the number of people eligible for a HAMP modification was less than we thought at the beginning, but a lot of people have been helped, and we’ve moved the modification industry from being somewhat predatory to stable and helpful.
| October 15, 2010; 4:07 PM ET
Categories: Housing Crisis, Interviews
Save & Share: Previous: Dissents: The constitutionality of the individual mandate
Next: The constitutionality of the individual mandate, cont'd
Posted by: visionbrkr | October 15, 2010 4:29 PM | Report abuse
Posted by: johninflorida | October 15, 2010 4:42 PM | Report abuse
Posted by: Bullsmith1 | October 15, 2010 5:03 PM | Report abuse
Posted by: Bullsmith1 | October 15, 2010 5:03 PM | Report abuse
Posted by: destor23 | October 15, 2010 5:33 PM | Report abuse
Posted by: jnc4p | October 15, 2010 5:41 PM | Report abuse
Posted by: stonedone | October 15, 2010 5:44 PM | Report abuse
Posted by: Hopeful9 | October 15, 2010 7:03 PM | Report abuse
Posted by: bgmma50 | October 15, 2010 10:43 PM | Report abuse
Posted by: 54465446 | October 16, 2010 11:04 AM | Report abuse
Posted by: CvilleMan | October 16, 2010 12:06 PM | Report abuse
Posted by: bcamarda2 | October 17, 2010 9:52 AM | Report abuse
Posted by: FloridaChick | October 18, 2010 8:45 PM | Report abuse