July 13, 2010

The Trouble with HAMP

It's distressing that the people in Washington who seem to be making up the rules as they go along seem to be willing to keep bailing the sinking ship instead of fixing the leaks.

HAMP, the program envisioned to mitigate the foreclosure disaster is a disaster in and of itself. Elizabeth Warren, the Chairman of the Congressional Oversight Panel told Treasury Secretary Timothy Geithner:
"We only have three months left with hundreds of thousands of families facing foreclosure. Is it time to rethink whether or not a mortgage foreclosure prevention program that is based on a group of servicers whom you describe as having done a 'terrible job' is a program that perhaps should be redesigned?"
We've been telling people mortgage modifications are not what they're cracked up to be for over six months: The Fairy Godmother and the Mortgage Modification Myth

Given that HAMP was designed by, and for servicers who have their own financial best interests in mind, any approach that relies on them to fix something they really don't see as broken is doomed to fail. And unlike Washington, the financial entities that own the servicers are thinking long term.

They have been for some time. The list of acquisitions by giant firms like Bank of America, JP Morgan Chase, Credit Suisse and Citi reflect the fact that mortgage servicing can be incredibly profitable even when foreclosures mushroom and REO inventories grow.

The financial services industry is an extremely patient lot. Even while the housing market founders, their potential customer base is shrinking. Fair Isaac reports that 25% percent of Americans have credit scores below 599, up from the 15% historical norm.

Some of that is represented by foreclosures - one of those can take 150% off a borrower's score and as of the end of March there were 1.2 million in process. No one wants to talk about what an application for a mortgage modification does to the applicant's score but you can be sure it's not a boost. And if a borrower walks away from a Fannie Mae mortgage there's an even more ominous threat:
"Defaulting borrowers who walk away and had the capacity to pay or did not complete a workout alternative in good faith will be ineligible for a new Fannie-Mae-backed mortgage loan for a period of seven years from the date of foreclosure. ... Fannie Mae will also take legal action to recoup the outstanding mortgage debt from borrowers who strategically default on loans in jurisdictions that allow for deficiency judgments."
All-too conveniently, Fannie Mae gets to determine what 'capacity to pay' or 'good faith' mean in a workout with even the most obdurate or incompetent servicer.

As we have complained over the years, credit scoring (which fueled the rush to the disaster of automated underwriting) is fundamentally flawed and not only because of the GIGO (Garbage-In, Garbage-Out) syndrome.

Not knowing how the scores are used and applied, most people simply see a number - as do automated underwriting programs. A mortgage applicant that has only had that new auto loan for a few months but is successfully paying it on time may have the same score as someone who has a few late payments on credit cards.

The real issue is still simply one of borrower ignorance and too many players in the industry willing to take advantage of it.

Take a few minutes to watch the "Insanity" video (at right) to see where we believe the answer lies.

Craig and Dave