Lender Disorganization Prevented 70% More Homeowners From Getting HAMP Modifications
When President Barack Obama was inaugurated in 2009 he faced an economic crisis this country had not seen in nearly 80 years. He launched a multi-billion-dollar effort known as HAMP to stem the flood of home foreclosures.
The White House launched the Home Affordable Modification Program or HAMP. The aim of HAMP was to help families keep their homes. The program offered incentives to banks and loan-servicing companies to modify mortgages of troubled borrowers.
Economists believed that foreclosures were losing proposition for everybody involved. Lenders would face long-term losses from a foreclosed mortgage instead of negotiating more favorable terms with the homeowner. Foreclosures also drag down the value of surrounding properties by creating a cascade of lower values across the housing market.
HAMP offered financial incentives lenders to negotiate loan reductions with at-risk homeowners. The government would pay the mortgage lenders $1,000 for every loan they modified. They would also pay lenders an annual $1,000 for every borrower who stayed current over the next three years.
A new study co-authored by Amit Seru at Stanford Graduate School of Business finds that HAMP produced 1 million additional permanent loan modifications. The study also shows HAMP prevented about 600,000 foreclosures that otherwise would have occurred.
Lenders Weren’t Up To The Challenge To Fix The Mess They Created
HAMP saved over 1.6 million homeowners from losing their homes but the program fell short of the Obama Administration’s hopes. The White House had hoped to spur as many as 4 million loan modifications. They also hoped to prevent the millions of foreclosures that resulted from the financial crisis.
Seru’s study concludes the main reason for the shortfall was surprising. Many mortgage-servicing companies weren’t up to the job. A significant share of those companies lacked the organizational capacity to renegotiate large numbers of loans. They also opted not to make internal changes that would have enabled them to take advantage of the program.
Foreclosure defense experts also saw servicers contract the work out to third-party vendors. Vendors who had no experience in lending or were sham outfits.
Non-HAMP lenders were simply less interested in modifying loans and they had also been that way before HAMP.
Additionally, Seru and his colleagues also concluded that some lenders lacked the organizational infrastructure for dealing with customers. They generally had less staff for loan servicing and they spent fewer hours training employees. Their telephone call centers also had longer holding times and higher numbers of dropped calls.
The researchers say there were ways to solve the problem. Unprepared banks could have transferred their loans to those with better infrastructure. Commercial lenders automatically transfer non-performing loans to a special servicer that’s equipped to deal with work-outs.
The moral of the story is that policymakers have to think about the nature and organization of the intermediaries. Policymakers who want to encourage more renegotiation have to take into account that some banks just don’t have the organizational design conducive for such activity.
Discrepancies Between Lenders
Seru also concluded that HAMP worked as its supporters had hoped. The 1 million loan modifications it spurred reduced borrowers’ monthly payments by an average of about 25%. People who received the modifications were 12% less likely to go into foreclosure.
HAMP also appears to have helped stabilize housing prices. In regions where mortgage companies used HAMP home prices recovered slightly faster than average.
Those regions also showed other signs of improving financial health. Homeowners who received modifications were less like to be delinquent on credit cards and home equity loans. HAMP recipients were also able to spend money on big-ticket durable goods. Seru’s research also found very little evidence that the government program crowded out private efforts at loan modification. Additionally, the study shows that there was an expansion of renegotiation activity in the economy due to the program.
Another issue was the huge difference among banks in their willingness to accept the federal incentives. Some mortgage servicers pursued four times as many loan modifications as others.
The number of permanent loan modifications would have reached 1.7 million, or 70% higher if only non-HAMP lenders had actively participated in the program.