Federal Housing Program Fails To Help Most Underwater Homeowners

As part of a strategy to fix the nation's ailing economy, the Obama administration in February 2009 announced the Making Home Affordable initiative to reduce foreclosures and preserve home ownership.

Many of the initiative's housing programs have been funded by the Troubled Asset Relief Program (TARP), the massive bank bailout plan approved in 2008 by then President George W. Bush. The Obama administration said at the onset that the intent of the housing programs was never to prevent all foreclosures but to help responsible, but struggling, homeowners keep their homes.

The problem, though, is that too few underwater homeowners have benefited from the programs, which is why President Barack Obama was in Las Vegas Oct. 24 to announce changes to one of the major housing programs, the Home Affordable Refinance Program (HARP). This program is designed to help homeowners who have been unable to refinance their homes through traditional means because of the decline in the value of their homes. The intent is to set up the qualified homeowners with new, more affordable loans.  

One reason too few homeowners have received federal help to make their mortgages more affordable has been program qualifications that are too strict for most of them to meet. Obama conceded as much in Las Vegas outside the home of Jose and Lissette Bonilla when he said that under the HARP guidelines homeowners couldn't qualify if what they owe on their mortgage exceeds the value of their home by at least 25 percent.

"And this is critically important for a place like Las Vegas, where home values have fallen by more than 50 percent over the past five years," Obama said. "If you've got a $250,000 mortgage at 6 percent interest rates, but the value of your home has fallen below $200,000, right now you can't refinance. You're ineligible. But that's going to change. If you meet certain requirements, you will have the chance to refinance at lower rates, which could save you hundreds of dollars a month, and thousands of dollars a year on mortgage payments."

The Obama administration announced changes to HARP eligibility for homes with fixed-rate mortgages backed by Fannie Mae and Freddie Mac, including removal of the requirement that one's amount owed cannot exceed the value of the home by more than 25 percent. Certain fees for borrowers will also be reduced or eliminated.  

Considering the 269,560 mortgaged residences in the Las Vegas metro area that were underwater as of June, according to real estate analytics firm CoreLogic of Santa Ana, Calif., the number of Southern Nevadans helped by federal mortgage relief programs has been minimal.

One of the Obama administration's most heavily publicized housing programs, the Home Affordable Modification Program (HAMP), had resulted in only 14,327 permanent mortgage loan modifications in the Las Vegas metro area through August, with an additional 2,076 going through the program on a trial basis, according to the U.S. Treasury Department.

State and city breakdowns of HARP participation levels aren't publicly available, but only 894,000 homeowners have benefited from the program nationwide, barely more than one-third of the numbers served by HAMP. If 2.1 percent of HARP recipients came from Las Vegas -- the same percentage of city residents that make up HAMP's national caseload -- that means 18,774 Southern Nevada residents would have been served. With the 16,403 served by HAMP, it would mean that 35,177 Las Vegas residents combined have been helped by the two biggest housing programs the Obama administration has to offer. But that would mean only 13 percent of underwater Southern Nevadans have been served by those programs.

HAMP is designed to modify mortgages such that a typical modification has resulted in a 40-percent drop in monthly mortgages for participants. To meet HAMP requirements the home must be owner-occupied and the mortgage has to have been obtained no later than Jan. 1, 2009. The amount owed cannot exceed $729,750 or 31 percent of the applicant's monthly gross income. The applicant also has to prove financial hardship and is either delinquent or in danger of falling behind on mortgage payments.

The Obama administration has said that more than 816,000 homeowners nationwide have received permanent modifications through HAMP and have reduced their mortgage payments by roughly 37 percent, or more than $520 a month.

But the Office of the Special Inspector General for the Troubled Asset Relief Program, in a quarterly report to Congress on Oct. 27, disclosed that of the $45.6 billion in TARP funds set aside for mortgage relief and other housing programs, only $2.5 billion, or 5.4 percent, had been spent as of Sept. 30.

"The TARP-funded housing support programs continue to struggle to reach homeowners, especially the signature Home Affordable Modification Program," the inspector general wrote.

The inspector general, as it had previously, made recommendations to the Treasury Department on how to make the housing programs more accessible to struggling homeowners in light of loan "servicers' poor treatment of homeowners and serious failures by servicers to follow program rules." The inspector general wrote that through its hotline it "continues to hear about homeowner frustration with the performance of mortgage servicers involved in TARP housing programs, particularly in HAMP."

With only one year left for mortgage modifications under HAMP before it expires, the inspector general said that an additional 520,000 to 600,000 homeowners nationwide who are otherwise eligible for HAMP are at risk of being shut out of the program unless the Treasury Department forces servicers to become more proactive in helping the homeowners.

The inspector general made four recommendations:

1. Whenever there is a change in the status of a homeowner's modification application , trial or permanent modification, the servicer should do so in writing. The Treasury Department declined to act on this recommendation but the inspector general said that was a mistake based on the complaints it had fielded from participating homeowners.

2. The Treasury Department should set goals for acceptable program performance by servicers, including the length of time it takes for trial modifications to be converted to permanent ones and the length of time taken to resolve escalated homeowner complaints. Treasury responded that it has already set benchmarks for servicers, including trial periods that should last no more than four months and escalated cases to be resolved within 30 days. "If these are benchmarks for acceptable performance, many servicers have missed the mark," the inspector general wrote. "Treasury should measure all servicers against those benchmarks, because without acceptable benchmarks, servicers will continue their bad practices and ultimately homeowners may suffer."

3. Treasury should publicly assess the performance of the nation's top 10 loan servicers against acceptable performance benchmarks. Treasury declined to implement this recommendation, to which the inspector general responded: "It is absolutely appropriate for a top 10 servicer receiving millions of dollars in TARP funding with poor program performance in these areas to have its rating made public."

4. Treasury must ensure that servicers follow their participation agreements -- such as by withholding financial incentives, if necessary -- and should make public all remedial action against servicers who fail to perform at an acceptable level. The inspector general disputed Treasury's claim that it has succeeded in improving servicer performance, citing the numerous homeowner complaints that continue to be made against servicers. "If Treasury does not take action to change the status quo of its compliance program, servicers will not take action to change their status quo," the inspector general wrote. "Compliance with program guidelines is not, and must not be, voluntary."  

When Nevada Attorney General Catherine Cortez Masto sued Bank of America in December 2010 for allegedly deceiving Nevadans about loan modifications and other mortgage-related issues, one of the primary criticisms was that the bank violated HAMP rules when dealing with borrowers. The bank, though, denied those allegations.

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