President Obama’s Home Affordable Modification Plan (HAMP) is slowly reaching troubled homeowners—almost 500,000 borrowers have been offered trial loan modifications as of September 30. But, according to a new report from the Congressional Oversight Panel (COP) charged with evaluating foreclosure prevention, one in eight mortgages are currently in foreclosure or default and 250,000 foreclosures are initiated each month.
The COP report highlights three particular problems with HAMP as it is currently being implemented. First, the Panel is concerned that HAMP is not designed to address the current range of causes behind foreclosure. HAMP modifications reduce payments to an affordable percentage of the borrower’s monthly income. However, as unemployment is an increasing reason for nonpayment, there are questions about how effective this strategy would be for those with little to no monthly income at all. Secondly, the Panel questions the ability of HAMP to slow down the rate of foreclosure filings at its current pace—and even at its goal pace of 25,000 to 30,000 modifications a week. Currently, foreclosure starts are outpacing HAMP modifications 2 to 1, and the report notes that “Treasury’s own projections would mean that, in the best case, fewer than half of the predicted foreclosures would be avoided.” Finally, the panel raises concerns about the long-term effectiveness of HAMP, given that homeowners must first complete a three-month trial before they get a permanent modification and that payments will rise for many homeowners after 5 years.
Senator Jack Reed (D-RI) recently introduced the Preserving Homes and Communities Act of 2009, co-sponsored by Senator Dick Durbin (D-IL), that addresses some of the Panel’s concerns by requiring all mortgage lenders—not just HAMP participants—to ramp up homeownership preservation efforts. All lenders would be required to assess troubled borrowers on eligibility for a loan modification before starting the foreclosure process—and if the borrower is eligible, the lender would have to offer them the modification. The bill introduces measures that would alert us to a foreclosure crisis before it starts, such as a database tracking foreclosure indicators and yearly reports to Congress on foreclosure trends. Finally, the bill introduces two innovative homeownership preservation programs that go beyond loan modifications. The act would establish a mortgage payment assistance program to provide emergency grants to homeowners in times of hardship and relocation expenses for those who can’t avoid foreclosure.
The second proposed program would allocate money to states to start mandatory mortgage mediation programs, like the successful year-long pilot project in Philadelphia. Mediation would require lenders to sit down with troubled borrowers under the supervision of a trained mediator and find a mutually agreeable solution through modifications, payment plans, refinances, and other tools. All lenders would be required to participate. In Philadelphia, officials say that 60% of participants were able to remain in their homes.
The Preserving Homes and Communities Act would expand and deepen efforts to prevent foreclosure. Given the troublesome pace of new foreclosures, action like this is needed to supplement HAMP’s efforts.