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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.

By Ezra Klein  | October 15, 2010; 4:07 PM ET
Categories:  Housing Crisis, Interviews  
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Comments

not for nothing but the fact that Treasury officials in the HAMP program are getting wind of this and/or reading your blog and responding that quickly (much quicker btw than they did to distressed homeowners) really is more than a little bit scary.

Posted by: visionbrkr | October 15, 2010 4:29 PM | Report abuse

Least successful predatory lending program of all time. Was no one from the Gambino or Patriacca families available as consultants?

Posted by: johninflorida | October 15, 2010 4:42 PM | Report abuse

Shorter admin:

"If you're disappointed in HAMP, you first have to understand that everything we said about it was a big lie. Once you understand the homeowners who signed up were suckers, and we were just helping the banks slow a few foreclosures down, you can see how successful the program really was."

In a rational system you make fraud and crime illegal, and the government works to help people in trouble, not help those who put them there. This is a society eating it's institutions from within.

Posted by: Bullsmith1 | October 15, 2010 5:03 PM | Report abuse

Shorter admin:

"If you're disappointed in HAMP, you first have to understand that everything we said about it was a big lie. Once you understand the homeowners who signed up were suckers, and we were just helping the banks slow a few foreclosures down, you can see how successful the program really was."

In a rational system you make fraud and crime illegal, and the government works to help people in trouble, not help those who put them there. This is a society eating it's institutions from within.

Posted by: Bullsmith1 | October 15, 2010 5:03 PM | Report abuse

This is maddening. The goal of this program needed to be far more expansive than baloon mortgages. The issue is the decline in housing values. It isn't fair that people got scammed into buying overvalued homes.

As for cramdown authority -- we didn't need congressional approval. The Treasury could have used its TARP stakes in the banks to threaten full takeovers if the banks didn't play nice. We had preferred shares that we could have converted to common and take over their boards. We OWN Citigroup! We OWN Fannie and Freddie. How can companies that we own do things that we don't want them to do?

Posted by: destor23 | October 15, 2010 5:33 PM | Report abuse

Excellent interview. This was a great follow up question in particular:

"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?"

Two points:

1. One unstated implication of HAMP was "pretend and extend" on the hope that the economy would start to improve and this would result in increasing home prices fixing the underwater mortgage issue and then allowing permanent voluntary refinances.

2. "When you talk about forced bankruptcy modifications [like cramdown], it failed in Congress. It wasn’t politically feasible." Part of what is "politically feasible" involves Presidential leadership. There was a time in the spring of 2009 when CitiGroup both announced that they would support bankruptcy cramdown that leadership by Obama could have made a real difference. The same applies in the spring of 2010 when Bank of America joined them.

Much like the debate over the size of the stimulus bill, the question is whether the Obama administration didn't push for it because it wasn't "politically feasible" or because they thought it would undermine their efforts to recapitalize the banks through earnings and the banks priorities took precedence over homeowners.

I would have loved it if you had asked them straight up if the Obama administration and the Treasury department still support bankruptcy mortgage modification (cram down) as a matter of policy.

Posted by: jnc4p | October 15, 2010 5:41 PM | Report abuse

You're assuming this Administration wants to help citizens rather than corporations. I used to assume the same thing. The evidence has proved me wrong.

Posted by: stonedone | October 15, 2010 5:44 PM | Report abuse

"You have to think about HAMP in the context of who it was supposed to help and why. It set a framework for evaluating... able to... potential to become permanent."

It would be funny if the failure weren't so serious.

Posted by: Hopeful9 | October 15, 2010 7:03 PM | Report abuse

EEEK! Please God, don't let these idiots perform any loan mods.

"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."

No s**t, Sherlock. DON'T modify that loan. IT'S HOPELESS!!!! Not only is the debtor never going to fulfill the terms of the loan mod, but that debtor is not even being hurt. He likely put little or nothing down and has now been living in the house for free for 6 months. He's playing you idiots for a fool.

grrrrrrrr.

Posted by: bgmma50 | October 15, 2010 10:43 PM | Report abuse

Ezra: I know you love her, but can't you hear the voice of Christina Romer in Phyllis Caldwell? "Well everything was much worse than we forecasted, so it's not our fault that things didn't go well" (to paraphrase)

Which then begs for the question to be asked.

Since you have no practical experience whatsoever; and your only value to the government is a supposed knowledge of hypothetical models of economic behavior that is greater than non-college professors; why did we hire you?

Posted by: 54465446 | October 16, 2010 11:04 AM | Report abuse

My wife and I are the poster child for what's wrong with the HAMP program. My wife lost her RN job in April of last year and we fell behind in our payments to IndyMac. We then were offered to apply through the HAMP program and had our mortgage reduced during the trial period. We sent in everything they requested starting in October of 2009. In December we got a letter asking for one, final piece of information. We promptly sent it in, called them, talked to a nice person who said, we have everything and will let you know in 30 days. Since then we have made 12 straight payments on time, responded to six additional requests for information, documented everything including all calls. Then in July, we get a letter out of the blue saying we were being denied for not sending in requested documents. This, two weeks after they got the most recent requested information, that only requested a week prior to that. We called, talked to somebody who said, our bad, this is what we need, and lo and behold, it's the same thing they requested 6 months prior and had not been requested in writing since then. The guy says he talked to his supervisor and they would allow us to enter a dispute of denial. Why did we have to in the first place!! We have sent everyting they requested on time from the beginning Then, out of the blue three weeks ago, a demand or else letter for the differences between the principal and the reduced amount in total. We called, they tell us, oh, you were not really being allowed to enter a dispute filing. That even though the paperwork says we have 30 days in fine print and we have a letter sent within a week of that letter. So now, after filing a complaint, they say they are "considering" our dispute of denial. Then we got the second demand or foreclosure letter. Needless to say we have filed a request for our Congressman to get involved but have low expectations to say the least. We should qualify for the program based on the guidelines, we have provided everything they need and they have had everything they needed to make a decision at least 5 times during this process and still no response. They are playing lip service to the program, have no incentive to help us and in the cases of the people at OneWest, no real desire to make it work. In addition, the Stop/Loss agreement deal they made motivates all the wrong behaviour by letting them add up the differences in the payments and take more in the end. Why does the government come up with a program that could truly help families like ours fighting a tough financial battle and give them every incentive to foreclose. Mr. Klein has it right and everything he recommended should be enacted as soon as possible. Needless to say, the stress on my family is beyond belief. I wish the money guys beyond OneWest had to feel it for just one day.

Posted by: CvilleMan | October 16, 2010 12:06 PM | Report abuse

I really hate to admit this, but when I read this interview, my first reaction was: "Why, exactly, did I just send $100 to Organizing for America"?

OK, my second reaction was: "I did it because I know the alternative." But it didn't make me very happy.

The fierce urgency of maybe, possibly, potentially, conceivably, someday, if only...

Posted by: bcamarda2 | October 17, 2010 9:52 AM | Report abuse

astounding and deeply, deeply disturbing incompetence (again) by Phyllis Caldwell, who gave rise to derisive laughter when she pushed the "well they got to try" line about failed mods as Congressional testimony.
that blooper deserved to die and to see it recycled months later is the essence of arrogant disregard for the millions of homeowners whose taxes pay her salary and benefits.
those dumped from trial mods are *much* worse off, as definitively documented by propublica.org (loan mods section.) their credit is dinged up to 200 points, they are slammed with an immediate demand letter for the "delinquent" arrears and they get a whole slew of padded charges, fees, back interest tacked on to their notes.
they are significantly worse off, to say nothing of stressed out after the relentless, mind-numbing agony of dealing with the "other world" of loan mod apps. lost faxes, endless phone trees, not uniform form to use (making it easier for regulators to track progress) and hired help that is fresh from min. wage labor elsewhere or outsourced to God knows where.
HAMP has been a miserable failure and a signal disappointment by the Obummer admin., who solicitously saw that banks and brokerage houses (even foreign banks) got 100% payment on every last (devalued) note in the counterparty scandal they hope you do not understand.
meanwhile homeowners have been cast adrift, mocked by the ineffective and even harmful HAMP program.
Phyllis Caldwell: no-one in gov. better encapsulates the clueless, tone-deaf essence of a smug, misguided Dilbert. her actions (and inaction) are directly and specifically responsible for sheer tragedy among millions of fellow citizens.
I deplore her presence on the gov payroll and eagerly await her departure from the service of my beloved country.

Posted by: FloridaChick | October 18, 2010 8:45 PM | Report abuse

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