Yes, we can’t

Let’s pretend you’re a politician and that you had created a program presumably designed to stem the tide of foreclosures. Next imagine that program was an utter failure, and that the rate of that failure was increasing. What should you do? Yes, the correct answer is to expand the program. Start by raising the stakes on the Home Affordable Refinance Program to 125% of existing home value, even in steeply declining markets. Good. And don’t stop there. Go ahead and propose that unemployed homeowners already in default, should be allowed to stay in the home even after foreclosure, and rent the property back from the bank. Genius! Pure genius! It was so simple I don’t know why I didn’t think of it myself. With no money or job to make a mortgage payment, these poor folks are ideal long term tenants. Sound like a bad dream? Well unfortunately that is exactly what our bright lads in Washington are up to now.

Several months ago I wrote about the Homeowner Affordability and Stability Plan (HASP). As a part of that program, $75B was set aside to help Americans stay in their homes and prevent foreclosures, in yet another program called “Making Home Affordable”. The Making Home Affordable Program is broken down into two distinct sub-programs, the Home Affordable Refinance Program (HARP) and the Home Affordable Modification Program (HAMP). At the time it was created, the Home Affordable Refinance Program allowed borrowers who were current on their payments to refinance; even if what they owed was as much as 105% of the value. But that program apparently needed a boost and on July 1 that limit was raised to 125%. Now correct me if I am wrong, but wasn’t this crisis caused by making sub-prime loans to 125% in the first place?

The “Home Affordable Modification Program” on the other hand requires lenders to modify the terms of existing loans for consumers who are in default, so long as they meet certain requirements. And of course, one of those requirements is that they be in default. I wrote then that this program looked like trouble for several reasons, not the least of which was the incentive it provided for consumers to “let their loan go bad” in order to qualify.  Call me crazy…but why spend billions of dollars to stop mortgage defaults, with a program that actually increases mortgage defaults? When I wrote that article in March, a little over 40% of modified mortgages re-defaulted in the first 3 months after modification. Now fast forward here to the end of July. Just 4 months later, that percentage of modified mortgages that re-default after three months has jumped to 50.4%. And after just 12 months post modification, the re-default rate is a staggering 63.3% (according to the Office of the Comptroller).

            Well with a winning a program like this, the administration really had no choice but to double down, right? Sure enough, on July 16^th Reuters reported that the Obama Administration was: … also weighing a plan to let borrowers who have fallen behind on payments avoid eviction by renting their homes instead… Senator Charles Schumer, a senior Democrat on the Senate Banking panel, said on Thursday he backed the idea of letting distressed homeowners stay in their homes as renters even after they default on their mortgage. "This could make sense as a last resort for troubled homeowners who would otherwise lose their homes and find themselves with nowhere to live…" Yep. Genius. Pure genius alright!