HAMP extension was the right move and shows us how to get ahead of the next crisis
Early in the Great Recession, the federal government took a big step toward permanently changing the way banks service troubled mortgages. With the 2009 introduction of HAMP—the Home Affordable Modification Program—the government essentially began a public-private partnership with dozens of banks and mortgage servicers by incentivizing them to modify struggling loans and keep families in their homes.
At a joint Urban Institute and CoreLogic seminar last night—moderated by Alanna McCargo of CoreLogic—government officials, researchers, mortgage servicers, and housing experts discussed the lasting impact of those changes and the implications of the recent decision to extend HAMP until 2015.
The upshot is that the public incentive for private modifications worked. “You’ve ended up with a lot more significant modifications and far fewer liquidations,” said Laurie Goodman, director of the Urban Institute’s Housing Finance Center. “There’s been a fundamental change in the modification landscape."
More specifically, the incentive encouraged more modifications overall, while also ensuring that modifications were more likely actually to help homeowners by reducing the monthly payment, often significantly. Prior to HAMP, too many modifications simply tacked the delinquent portion of the loan on to the end of the period and deemed the loan current. HAMP encouraged modifications that actually help families’ monthly budgets, including reducing monthly payments or interest rates, extending the term of the loan, and in some cases reducing principal owed.
What’s more, since the recession, HAMP has represented less than 25 percent of all modifications. Many private servicers have actually taken HAMP guidelines as a blueprint and changed the way they structure their own proprietary modifications. In doing so, they have helped millions of families stay in their homes.
So, with another two-and-a-half years of HAMP incentives, what can we expect to see? The good news is that with the general economic recovery and the continued improvement of the housing market, we should see fewer modifications overall. People’s home values are rising, and that increase in wealth makes it easier to keep mortgages current.
Additionally, the modifications that we do see should be smaller on average. A requirement of HAMP modifications is that the loan must pass a Net Present Value test—that is, a test of the strength of the loan as an investment asset. As home prices rise, mortgages become stronger assets, making needed modifications smaller.
Panelists Meg Burns from FHFA and Dana Dillard from Nationstar Mortgage both emphasized that changes to HAMP must be—and are—geared toward getting as many customers as possible into modifications. Those changes include improving program clarity, making one unified set of rules, and reducing the customer’s document burden. Panelists, who also included Mark McArdle of the U.S. Treasury Department and Andy Miller from PNC, likewise discussed the need to think beyond HAMP, to the development of a consistent, up-front understanding of how to treat borrowers in trouble to optimize outcomes for them and for investors.
In general, this all suggests good news. Goodman believes we’re approaching the end of the delinquency and foreclosure crisis. The next big housing finance issue may be on the opposite side of the equation—getting mortgages in the first place. With lending standards tighter than ever, home prices rising, and millennials losing wealth compared with their parents, will the next generation be set up to purchase the homes vacated by retirees and left empty by the crisis?