Last week, under pressure from Capitol Hill, the US Treasury Department announced it would triple incentive payments to investors, fund loan principal forgiveness by US-controlled mortgage financiers Fannie Mae and Freddie Mac, and allow distressed homeowners another year to enrol in its signature borrower aid initiative, the Home Affordable Modification Programme (Hamp).

Initially billed as helping “3m to 4m at-risk homeowners avoid foreclosure”, Hamp has woefully underperformed, according to government auditors, borrower advocates and industry experts. Less than 763,000 borrowers have had their monthly payments permanently reduced.

The changes are just the latest in a long line of alterations and new initiatives implemented to help Hamp fulfil the 2009 promise made by Barack Obama, US president. As Mr Obama faces the prospect of a dispirited base for his November re-election, his administration has put a renewed emphasis on aiding borrowers and lifting the struggling housing market out of the doldrums.

The White House has rolled out programmes to forgive borrowers’ second liens and give unemployed homeowners a months-long forbearance from payments while they look for a new job. It has even tried to entice lenders to reduce loan principal in exchange for being protected from losses due to default by allowing borrowers to refinance into a cheaper mortgage backed by the US Federal Housing Administration (FHA).

Two years later, the FHA programme has helped only 646 borrowers, according to the Special Inspector General for the Troubled asset relief programme (Sigtarp). The figures underscore the difficulties the White House has faced in trying to get the US housing finance system to help troubled borrowers weather the most punishing economic downturn since the Great Depression.

But many analysts say that the administration deserves much of the blame. Experts were baffled by last week’s move, in which the Treasury touted that it will triple its incentive payments to investors in hopes they will forgive borrowers’ loan principal. Borrowers with negative equity owe roughly $700bn more on their housing debt than their homes are worth, according to CoreLogic, a research firm.

“This Hamp change should have a muted impact at best”, said Anish Lohokare, analyst at BNP Paribas.

Analysts wondered why Treasury officials did not increase payments to servicers, the companies that collect payments and seize homes when borrowers default.

“Part of the reason why participation in this program has been so poor is because of the conflict of interest for servicers”, said Neil Barofsky, the former head of Sigtarp and a law professor at New York University.

“It’s more in [servicers’] economic interest to foreclose rather than put borrowers into a Hamp modification”, Mr Barofsky said. In the case of principal forgiveness, “one of the problems is that servicers are paid based on a percentage of the active principal. Principal reduction eats right into their bottom line.”

Mr Barofsky recommends that Treasury mandate loan principal forgiveness in situations where the owner of the mortgage stands to gain more from a restructuring than a home seizure.

Joshua Rosner, managing director at Graham Fisher & Co, said of last week’s announcement: “The structure suggests [administration officials] don’t really want it to work. They just want it to look like they’re doing something.”

About 36,000 Hamp loans have been modified by reducing principal. Treasury officials assured borrower advocates that more principal reductions will occur, despite the incentives-based approach, according to participants in those discussions.

“This points at the fundamental problem of Hamp – it’s incentives-based”, said Alys Cohen, an attorney at the National Consumer Law Center. “It sets up incentives and hopes for the best, but in the end what homeowners need are outcomes. They don’t need hope.”

Though the new approach aims at reducing the prevalence of negative equity, the median borrower in Hamp sinks further into negative equity with the modification, thanks to capitalisation of unpaid interest and fees, according to Sigtarp. Half of Hamp borrowers have a loan-to-value ratio more than 123 per cent.

The Treasury has about $21bn in unobligated Hamp funds to use for its latest expansion, according to Andrea Risotto, a spokeswoman. Among its latest actions is to make more of that money available for Fannie Mae and Freddie Mac to reduce borrowers’ loan balances. The home loan financiers’ regulator, the Federal Housing Finance Agency, said it will review Treasury’s offer.

Administration officials had been under pressure from Jack Reed, US Senator, since at least September to fund principal reductions undertaken by Fannie Mae and Freddie Mac, aides said. The Rhode Island Democrat praised Treasury on Friday.

“But why didn’t they do this years ago?” Mr Barofsky asked of Treasury’s Hamp changes. “How many families lost their homes because they’ve dragged their feet on trying to fix something that was so obviously broken?”

A Sigtarp report last week faulted Treasury for its lax enforcement of Hamp rules, warning that the Obama administration’s failure to crack down on recalcitrant banks risks harming distressed borrowers.

(Original article can be found HERE)

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