Obama's latest housing plan may be too little, too late

President Barack Obama went to Las Vegas yesterday to unveil his administration’s latest proposal to help homeowners facing possible foreclosure. About a quarter of all U.S. homeowners are “underwater,” which means their homes are not worth as much as they owe on their mortgages. Nevada has an extremely high foreclosure rate and suffered one of the worst boom-bust cycles in the housing market. It’s also a swing state in presidential elections, which made it a perfect venue for Obama yesterday. I wish his team were putting as much effort into crafting a housing policy that would help people.

The Treasury Department’s Home Affordable Refinance Program (HARP) has been a failure by any measure. Only about $2.4 billion has been spent to help struggling homeowners out of $50 billion in available funding. About 900,000 homeowners have benefited, not the 9 million people the president promised to help through a foreclosure-prevention package he announced in February 2009.

The administration’s Home Affordable Modification Program (HAMP) has also done far less than originally advertised for homeowners. I recommend a series of reports for ProPublica by Olga Pierce and Paul Kiel:

“Loan Mod Program Left Homeowners’ Fate in Hands of Dysfunctional Industry”;

Govt’s Loan Mod Program Crippled by Lax Oversight and Deference to Banks;

Dems: Obama Broke Pledge to Force Banks to Help Homeowners;

and especially the latest installment, Secret Docs Show Foreclosure Watchdog Doesn’t Bark or Bite.

Mike Lillis summarized the basic elements of the new plan for The Hill:

On Monday, the Federal Housing Finance Agency (FHFA) – an independent agency that oversees Fannie Mae and Freddie Mac – announced a number of reforms to the Home Affordable Refinance Program (HARP), a 2009 program designed to prevent foreclosures by helping underwater homeowners obtain cheaper loans.

The program was estimated to help between 3 million and 4 million homeowners, but lenders are not required to participate, and fewer than 900,000 homeowners had benefited from HARP through August, FHFA said this week.

To boost those figures, FHFA is eliminating the current 125 percent loan-to-value ratio cap, effectively opening the door to more underwater borrowers. The agency is also getting rid of new appraisal requirements as well as some fees now charged to homeowners who refinance into shorter-term mortgages. […]

Edward DeMarco, FHFA’s acting director, was quick to note that the changes won’t expand eligibility to all the nation’s homeowners, but focus instead on enticing participation from those already eligible for HARP.

“This is not a mass refinance program,” he said. “It was really designed to enhance the program’s access for those borrowers who have always been the eligible population.”

I haven’t seen any comments on the administration’s approach from Iowa members of Congress. Some House Democrats from other states criticized the approach yesterday as “baby steps” insufficient to deal with the housing crisis. It’s not hard to grasp why they are skeptical:

While administration officials say it will help thousands of homeowners, the program has its caveats. Only those homeowners whose mortgages are backed by Fannie Mae and Freddie Mac will be eligible for refinancing. Borrowers must have good credit and must have kept up with their mortgage payments, with no late payment in the past six months and no more than one late payment in the past 12 months. Additionally, the mortgage must have been sold to the agencies before May 31, 2009, and not been refinanced previously under the Home Affordable Refinance Program. The loan-to-value ratio has to be greater than 80 percent.

Proponents of the program say it would help boost the economy by relieving financial stress on homeowners and reducing their mortgage so that they would have more expendable money.

But economists disagree on the number of people who would actually benefit. Some say it wouldn’t affect more than a 1 million households, a relatively small number given that more than 6 million homeowners are facing foreclosure or have delinquent payments. Others say the restrictions are too stringent and automatically cut out those under-water homeowners who have bad credit.

Yves Smith argues that the latest scheme is nothing more than a “Potemkin” plan:

This plan will at best provide only modest help to homeowners. And in some cases, it will worsen their position. In some states, a purchase money mortgage is non-recourse. In all state, my understanding is a refi is recourse with only narrow exceptions.

It will have virtually no impact on the housing market because it will keep loan balances at the same inflated levels. Similarly, it will not contribute in any way to new construction.

So why is the Administration bothering to do this?

First, Obama is addicted to the appearance of Doing Something, regardless of whether it is productive. A clear sign is the apparent failure to investigate why HARP was a dud. […]

Second, this is a sop to the banks, because a refi ends any liability associated with the origination of the mortgage, including putback liability. Now that would seem to be a big “get out of jail free” card for banks engaged in putback litigation. But the reason this is not as nefarious as it might seem is that current mortgages aren’t the big bone of contention in putbacks (even if the originator lied, the borrower is paying, so there are no damages). But it would also end any chain of title issue on that mortgage. […]

This plan is yet more proof that this Administration is not about to inconvenience banks to help homeowners and communities. It has tools in its power than would change the incentives for banks and make them far more willing to do what the overwhelming majority of mortgage investors would prefer, which is provide deep principal mods for viable borrowers. Forcing banks to write down seconds, and taking an aggressive stance on foreclosure fraud would [make] restructuring debt more attractive than it is now.

Forcing banks to do anything isn’t in Obama’s toolkit. Heads should have rolled long ago over the failure of HARP and HAMP. Paul Kiel’s report on lax oversight by the so-called government watchdog is particularly damning:

Documents obtained by ProPublica-government audit reports of GMAC, the country’s fifth-largest mortgage servicer-provide the first detailed look at the program’s oversight. They show that the company operated with almost no oversight for the program’s first eight months. When auditors did finally conduct a major review more than a year into the program, they found that GMAC had seriously mishandled many loan modifications-miscalculating homeowner income in more than 80 percent of audited cases, for example. Yet, GMAC suffered no penalty. GMAC itself said it hasn’t reversed a single foreclosure as a result of a government audit.

The documents also reveal that government auditors signed off on GMAC loan-modification denials that appear to violate the program’s own rules, calling into question the rigor and competence of the reviews.

Some of the auditors’ mistakes are “appalling,” said Diane Thompson of the National Consumer Law Center, an advocacy group. “It suggests the government isn’t taking the auditing process seriously.” […]

The documents obtained by ProPublica show auditors finding serious problems at a major servicer during that time. Instead of publicly revealing the findings, Treasury chose to privately request that GMAC fix the problems.

“For two years, they’ve known how abysmal servicers were performing, and decided to do nothing,” said Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, better known as TARP or the bank bailout, which provided the money for HAMP.

“It demonstrates that if you have a set of rules for which compliance is completely voluntary and no meaningful consequences for those who violate them, having all the audits and reviews in the world are not going to make a bit of difference,” he continued. “It’s why the program has been a colossal failure.”

Maybe losing re-election is the only thing that could shake Obama’s confidence in his incompetent Treasury Secretary Timothy Geithner.

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