mortgage

HAMP 'destined to fail'

Wednesday, Dec. 9
Written 10:15 a.m. EDT

LISTENING TO CASSANDRA: The federal effort to encourage mortgage modifications is doomed because the program is flawed, a couple of experts told a House committee yesterday. Those Cassandras didn't get as much attention as the witnesses who told the House Financial Services Committee that the mortgage servicers aren't trying hard enough.

Whenever a big initiative fails, you can pin the blame on the program's faulty design, or on the people trying to carry it out, or on a combination of the two. Right now we're trying to decide who was at fault for the failure of the Home Affordable Modification Plan, or HAMP. In yesterday's hearing, House Republicans blamed government bureaucrats. Democrats and consumer advocates blamed mortgage servicers. These charges and countercharges were so predictable, you could have scripted them beforehand.

In fact, HAMP was poorly conceived. For a while, I've been saying that HAMP was flawed because it tried to solve the wrong problem. In 2009, the problem is unemployment. But HAMP is designed to solve the problem of 2007 and 2008: unaffordable adjustable-rate mortgage, or ARM, resets.

Now I'm becoming convinced that HAMP's biggest flaw was the belief that the foreclosure crisis could be fixed at all. The housing bust is simply something that we have to suffer through. It's like middle school -- a few years of unavoidable misery.

The two doom-talkin' Cassandras I mentioned are Laurie Goodman, senior managing director for Amherst Securities, and Anthony Sanders, finance professor at George Mason University.

Goodman told the House panel: "The housing market is in fundamentally very bad shape. The single biggest problem is negative equity. The current modification program does not address negative equity, and is therefore destined to fail."

Sanders made a similar point to the House panel, but in less sound-bitey terms. He told me afterwards: "HAMP should be renamed 'Mission Impossible.'" (There's the sound bite!) Sanders continues: "The loan modifications make sense in a normal housing market, normal employment economy. They will not work in a world where 10 states had a serious correction in housing prices and unemployment has exceeded 10 percent."

Goodman says the HAMP program should more forcefully encourage lenders to forgive a portion of borrowers' mortgage principal, so homeowners will have equity in their homes and will be less likely to walk away.

Sanders believes a lot of foreclosures are inevitable, and that lenders should be allowed to amortize their foreclosure-related financial losses over an extended period (he suggests five years). Among other things, this would result in getting more foreclosed houses on the market, where investors could buy them, fix them up and rent them out.

Goodman and Sanders both argue that the HAMP program ignores not only negative equity and unemployment, but also that it doesn't address consumers' total debt. Instead, it pays attention only to consumers' housing debt.

This is what they mean: Let's say you earn $5,000 a month before taxes, and your house payment is $1,750. That's 35 percent of your gross income; in a HAMP modification, the payment would drop to $1,550, or 31 percent of income.

But let's say that, in addition to that $1,750 house payment, you owe a lot on your credit cards, car and student loan. The minimum monthly payments on those debts are $1,250. All of your debts, together, cost $3,000 a month, or 60 percent of pretax income.

Now, when HAMP reduces your mortgage payment $200, it cuts your mortgage payment to 31 percent of your income. But your total debt payments are $2,800, or 56 percent of gross income. For a lot of middle-class people, that's an unsustainable debt load. But the HAMP program doesn't recognize that this total debt load is too high.

This will be a difficult, and maybe politically impossible, problem to fix. Your credit card company and auto lender aren't going to reduce your monthly payments just because the mortgage lender is reducing the monthly payment.

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