HAMP (…ered) Recovery and the Flood of Foreclosures: Why Banks Can’t Lose

Posted by in Financing, Homeowners' Club

The Home Affordable Modification Program (HAMP) was supposed to stem the flood of foreclosures. The idea was quite reasonable: by making mortgage payments more affordable, HAMP was to keep families in their homes and by doing so help revive the real estate market. Too bad it is not working.

screen shot of Zillow (2010-09-03) on the Apple iPad showing Las Vegas foreclosures

Las Vegas foreclosures as seen on Zillow (2010-09-03) on the Apple iPad: most properties for sale in the area are REOs.

HAMP is not working. As many as three out of four HAMP-eligible applicants go right back into foreclosure.

HAMPered recovery

According to goverment statistics, troubled homeowners receive on average a $513 reduction in monthly payments. Even so, the average family has to spend as much as 63.5% of income on mortgage payments. Add to this taxes, car loans, credit card loans, student loans, tution costs, internet and phone bills, gas and car insurance and most families end up heavily in red ink. And they still have to find money to actually put food on the table.

Tax credits and loan modifications alone can’t really change the widespread misery in the real estate market. With unemployment at stubbornly high 9.5%, the economic outlook is not all that promising. The official 9.5% unemployment rate is actually way off the mark. If you count in the long-term unemployed who stopped looking for jobs, the number gets so scary no government agency volunteers to report it. A whopping 40 million Americans stay afloat on food stamps. It turns out at least one in five (20%) Americans is down on their luck.

HAMP is nothing more than an excuse for a thick layer of red tape. The program promises hope all right, but where are the results?

Of some 3 million homeowners at risk of foreclosure, only about half would qualify–on paper. Given the onslaught of red tape applicants are up against, only 1.3 million Americans actually received trial modifications. In fact it almost sounds good: 43% of those eligible. So how would you explain that 600,000 recipients of trial modifications already dropped out. There are only 700,000 left in the game. Another 250,000 are being left in a gray zone: waiting. As more and more homeowners are unable to make ends meet and keep up their payments, more desperate homeowners are going to drop out along the way. Families on the waiting list can’t wait for their turn to be on the receiving end of this government-administered lifeline. But for how long? A ride on this Ferris wheel is something only one in four applicants will actually survive.

HAMP cannot change the fundamentals.

Why Banks Cannot be bothered to Foreclose

According to some real estate experts, HAMP actually helps to delay the onslaught of foreclosures. There is only so much banks can handle in this economic situation.

HAMP was approved on the premise that it would prevent many American families from defaulting on their mortgages, but a reality check shows that homeowners are just kept longer in uncertainty as to their fate, which softens the impact of this crisis on banks. Banks just barely managed to make a profit and most of the revenues were used to repay TARP loans and other forms of government assistance. They need help. (As if homeowners didn’t.)

Now that the Financial Regulation Bill and the Credit Card Act of 2010 are law of the land, banks can’t feed on credit card fees that much anymore nor can they use some of their true and tried hot-potato-style trading methods. They will have to re-invent their way of doing business. On top of that, there are rules defining how many unsold REO (real estate owned) properties a bank can keep on its books. Plus, banks are in no business of paying property taxes and landscaping bills for unsold foreclosed homes. No wonder there is little inclination in the banking sector to rock the boat by speeding up foreclosures. In fact, banks are on purpose slowing it down to a crawl.

The average homeowner in foreclosure right now is not someone who missed three or six months of payments. The real number is nothing short of staggering: 461 days. Homeowners are on average over a year late when banks finally trigger foreclosure proceedings.

Adding insult to injury

As if the HAMP fiasco were not enough, Fannie Mae has introduced new rules which lock those who can’t modify their Fannie-backed mortgages right now for the next seven years. Wow.

Oh yes, America is now HAMPered enough, thank you. The Home Affordable Modification Program needs itself a “modification”, and fast. (Not that HARP is run any better.)