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New data on the Home Affordable Modification Program (HAMP) show that its program designed to incentivize principal reductions on underwater loans, the Principal Reduction Alternative (PRA), continues to reach a small fraction of homeowners. Recent changes to the program, as well as the $25 billion robosigning settlement, will likely boost the number of homeowners receiving principal writedowns, but the Government Supported Entities (Fannie Mae and Freddie Mac)’s regulator, the Federal Housing Finance Administration (FHFA), continues to reject calls to allow reductions of principal on its loans. This means that a large number of underwater homeowners will be ineligible for relief, given the GSEs’ substantial market share—as of the third quarter of 2011, the GSEs backed 71 percent of newly originated loans.
Nationally, active trial PRA modifications grew by four percent from November (15,875) to December (16,461), following a seven percent decline from October to November (see Fig. 1). Active permanent PRA modifications grew by 11 percent from 36,454 to 40,374 over the same time period, and grew by 13 percent between October and November. In December, principal was written down by a median amount of $67,196, or 31.3 percent, of the unpaid principal balance before modification. While the amount of principal reduced for homeowners receiving PRA modifications is significant, the scope of the program is small compared to the nation’s 10.7 million underwater loans. In the Chicago region, approximately 409,000 homes are underwater and we estimate that the average underwater homeowner owes $63,000 more than his or her home is worth. Treasury does not report on the local level for PRA, so we do not know what kind of impact the PRA program is having in Illinois.
This month, Treasury announced that it will triple incentives to servicers to write down principal on HAMP loans, paying up to two-thirds of the cost of a principal reduction. The small number of loans entering PRA thus far demonstrates the importance of action, like increased incentives, that results in larger numbers of loans receiving principal writedowns. The program change came shortly after FHFA Acting Director Ed DeMarco released an analysis of principal writedowns that concluded that the program would be too costly for Fannie Mae and Freddie Mac. Because the increased incentives should significantly impact the cost-benefit analysis of principal writedowns for the GSEs, we ask Mr. DeMarco to seriously reconsider his stance. Troublingly, a former Fannie Mae employee has claimed that a principal reduction program was nixed in 2010 because of “philosophical” objections, despite an analysis showing taxpayer benefit—a charge that the agency denies. We hope that the GSEs keep open the possibility of helping both homeowners and taxpayers with the revamped PRA.
The latest HAMP data also show that the GSEs have been slow to pursue alternatives to foreclosure when it is not possible to keep the homeowner in his or her home. The Home Affordable Foreclosure Alternatives program (HAFA) incentivizes HAMP participants to conduct a short sale or deed-in-lieu transaction instead of a foreclosure. Only 1,604 HAFA transactions have been completed on GSE-backed loans, compared to 18,350 private loans and 7,711 portfolio loans, and Treasury notes that the GSEs have “investor-specific guidance” on HAFA that is narrower than Treasury’s standards. Since foreclosures are costly for families and communities alike, the GSEs should be making every effort to avoid them whenever possible. If FHFA is not willing to engage more fully in efforts to write down principal and find alternatives to foreclosure, Mr. DeMarco should be replaced with a leader more inclined to fulfill the mandate to “maximize assistance for homeowners”, as delineated in the 2008 Emergency Economic Stabilization Act.
In the Chicago area, total HAMP modifications grew from 42,694 to 43,248 from November to December 2011, an increase of only 1.3 percent (see fig. 2 and 3). Year-over-year, active HAMP modifications grew by 23.5 percent. Permanent modifications grew by 1.7 percent from 38,671 in November 2011 to 39,334 in December 2011, which is an increase of 45 percent from December 2010. At the same time, trial modifications dropped by 2.7 percent from November 2011 (4,023 modifications) to December 2011 (3,914 modifications), and fell by 50.4 percent from December 2010. National trends tracked closely with regional ones.
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