- By David M. Kinchen
When the Obama Administration began the Home Affordable Modification Program (HAMP) in 2009 it was billed as the best practical solution to the nation’s continuing massive foreclosure crisis.
Now comes a study that says that while the HAMP program and other similar ones will have helped about 1.2 million homeowners modify their loans to avoid foreclosure by the end of 2012, that number falls well short of the three to four million homeowners the Obama administration promised when the program began in 2009.
According to “Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program” (link: report) — the report from Ohio State University, Columbia Business School, the University of Chicago, the Office of the Comptroller of the Currency, and the Federal Reserve of Chicago — big banks could have prevented an additional 800,000 foreclosures had they been better equipped to administer the federal modification program.
“But while evidence of these problems was pervasive, it was always hard to quantify the damage. Just how many more people could have qualified under the administration’s mortgage modification program if the banks had done a better job? In other words, how many people have been pushed toward foreclosure unnecessarily?
“A thorough study released last week provides one number, and it’s a big one: about 800,000 homeowners.
“Unfortunately for homeowners, most mortgages are handled by banks that haven’t been properly staffed and thus have modified far fewer loans. If these worse-performing banks had simply modified loans at the same pace as their better performing peers, then HAMP would have produced about 800,000 more modifications. Instead of about 1.2 million modifications by the end of this year, HAMP would have resulted in about 2 million.
“The report largely blamed poor training and poor staffing at the large banks for the shortcoming. A separate report from the Department of Housing and Urban Development earlier this year found that banks were using under qualified workers to process foreclosure documents, promoting untrained employees to the vice presidential level so they could approve foreclosures. At Wells Fargo, one employee processing foreclosures came to the bank from a previous job at a pizza restaurant.”
The pizza restaurant employee reminds me of the movie “Unstoppable” directed by the late Tony Scott, which notes at the end that the railroad employee who caused the runaway train is now “employed in the fast-food industry.”
While HAMP did modify loans and prevent roughly 800,000 foreclosures, the study found it could have helped another 800,000 homeowners if all lenders had been operating at the same high level of capacity. “That would have meant around 2 million homeowners would have been able to modify their loan instead of 1.2 million. And roughly 800,000 homeowners would have been able to avoid foreclosure,” said Tomasz Piskorski, a professor at Columbia Business School and co-author of the study.
Though the report does not cite which servicers fell short of expectations, it cites “a few large servicers,” hinting that the nation’s biggest banks were the main culprits, speculation backed up by recent reports that Bank of America has failed to offer any mortgage relief under the terms of the recent foreclosure fraud settlement it and other large banks reached with the federal government and state attorneys general.
In its story on the study and the failure of HAMP to reach its goals (link:http://www.nationofchange.org/report-blames-big-banks-800000-preventable-foreclosures-1347456250) the progressive news site Nation of Change notes:
“Though the report does not cite which servicers fell short of expectations, it cites “a few large servicers,” hinting that the nation’s biggest banks were the main culprits, speculation backed up by recent reports that Bank of America has failed to offer any mortgage relief under the terms of the recent foreclosure fraud settlement it and other large banks reached with the federal government and state attorneys general.”
Here’s the abstract from the study:
“The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity—which is also observed before the program—reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.”
And here’s the conclusion:
“We find that renegotiations induced by HAMP and its effects will fall significantly short (two- thirds) of the target of this intervention. This is largely because a few large servicers, with pre- program organizational design that was less conducive to conducting renegotiations, responded at half the rate of others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. The fact that some other servicers, with similar portfolio of distressed loans, actively conducted modifications under the program suggests that the incentive structure of the program may not have been inadequate per se. Rather, the program failed to account for firm level factors that resulted in muted program response of some servicers. The presence of these factors–and the lack of understanding of their specific nature–poses a significant challenge to the ability of the government to quickly influence such intermediaries through provision of financial incentives, thus hampering policies that require voluntary participation of such firms.31
“Our findings also suggest that the reallocation of resources that could help more effective implementation of the program—for example, through private contracting to allow the transfer of distressed mortgages to more efficient servicers, similar to provisions that exist in commercial real estate sector, or through the entry of better and more capable servicers—must have faced significant hurdles. What these challenges that prevent reallocation of resources are, especially in times of crisis, is an interesting avenue for future research.
“Our results also provide guidance for designing large-scale renegotiation programs in the future. In particular, our evidence suggests that HAMP did not lead to widespread strategic defaults, likely because of the extensive screening related to its eligibility criteria and its design of incentives for servicers. However, these factors may also have stalled the pace of the program. For example, verification of extensive eligibility criteria may have been challenging for servicers with less renegotiation experience, contributing to their low response to the program. These findings can be compared to the results from a simple modification program that employed only serious delinquency as its main eligibility criterion, as studied in Mayer et al. (2011), which led to significant strategic behavior. Consequently, there is a likely tradeoff between screening more intensively to reduce strategic behavior, which limits the unintended effects of the program, and the reach and pace of the program.
“Finally, because incentive payments were triggered only by permanent HAMP modifications, one could use the ratio of estimated permanent modifications induced by the program to foreclosures prevented in assessing the program’s success.32 Admittedly, this would be a very naive computation, since it ignores other costs (or benefits) of program implementation, as well as any aggregate or redistributional effects in the economy. Likewise, such a computation would not account for the potential impact of the program on the behavior of borrowers and lenders in the future or whether these foreclosures would be prevented in the longer term. As a result, we refrain from this exercise. More generally, in the absence of a model of what optimal level of renegotiations and foreclosures should be, we cannot determine whether HAMP helped correct a ‘market failure.’ Devising such a model is a fruitful area of future research.”
- report (3.12 MB)