HAMP and the Mortgage Crisis

In the five years or so prior to 2008 there was a party of unprecedented magnitude.  Invited to the affair were mortgage brokers, banks, title companies, appraisers, real estate brokers, and, oh yes, the homeowners.  Exactly what launched the process will be for social historians to determine, but there was a confluence of events that by its implosion in 2008, had achieved heights of irrationality never before experienced.

Perhaps its genesis was in the fundamental shift in our banks during the last quarter of the 20th Century.  The ultra-conservative middle-aged, fairly stiff banker who was more likely than not to reject a loan application was replaced by a cadre of less risk-adverse younger bankers who were drawn to mortgage lending by the enormous fees involved.  The fees were paid from the money being lent, so that it was all but “painless” to the borrowers.  Short term bank profits increased dramatically as did the earnings of the youth corps who were processing these loans.

What followed was a grand, unwritten conspiracy.  A real estate broker’s success in selling a house is very often contingent upon the buyer’s obtaining the necessary financing; the real estate agents quickly discovered the mortgage brokers who almost assuredly were successful in procuring mortgage loans.  Mortgage brokers developed rapport with the banks that readily approved loans.

As the rate of home sales soared (the “McMansions”), inevitably home prices rose at unprecedented rates. The cycle fed on itself, as prices rose, the need for mortgage funds increased proportionately as did all the fees associated with the borrowing process.

A cardinal principle in lending until this frenzy was that loans should be made only to borrowers who will have the capability to make repayments as scheduled.  It might have been in 2003 that I first heard the term from a real estate broker, in discussing a new sale; when I raised the question of financing, she said, “oh, no problem, this is a no-doc loan.”  Lenders were actually making large mortgage loans without documentation regarding the borrower; all that mattered to them was the appraisal of the real estate because everyone knew that real estate values just keep rising (except when they didn’t!), and that would protect the lender’s principal.

Though we should have seen the folly of the process, for the most part we did not.  The soufflé fell with a thump that led us into the most serious recession since the ’30’s.  Banks failed at an alarming rate, and size was no insulation against collapse.  The housing industry was stopped in its tracks, job losses followed, and a massive number of mortgages went into foreclosure as the unemployed were unable to make their periodic payments.

A Philadelphia Judge, Annette Rizzo, quickly recognized the pending disaster as the jobless families would quickly become homeless.  Judge Rizzo proposed a plan for the City, and it has become a model nationwide and beyond.  Under the program all residential mortgage foreclosures in the City were required to enter into mediation in an effort to exhaust all avenues for salvaging mortgage loans before they could proceed to foreclosure sale.

Judge Rizzo recruited a couple of hundred lawyers as volunteers to represent homeowners in their negotiation with foreclosing lenders; in addition another 50 volunteers were recruited to participate as mediators, or judges pro tem (“JPT”), where the negotiations between the lenders and the homeowners are stalemated.  I have worked as a JPT, and have experienced firsthand the frustration, not only of the homeowners but of the lenders as well.  With the unprecedented housing glut of the past four years, no bank needs to own yet another home in a struggling neighborhood, purchased at a sheriff’s sale.  Much preferable, where it is feasible, is a reset mortgage where by reducing the interest rate and stretching the term of the loan, the homeowner has sufficient income to make the required monthly payments, and for the bank it will become a performing loan.

Out of the panic that the housing/lending industry was experiencing came the federally regulated Home Affordable Modification Program (“HAMP”).  The goal of HAMP is to reduce the monthly payments of a homeowner in foreclosure by decreasing the rate of interest and increasing the term of the loan (up to a maximum of 40 years).  The goal is to reset the monthly payment so that it represents less than 31% of a household’s monthly income (the average HAMP applicant’s monthly obligation is about 45% of their gross income).  Note that while HAMP is federally regulated, there are no federal funds involved in the program.

It is imperative that the parties do not reset a loan where it is unrealistic to expect the homeowners to be able to meet their new obligation.  Once it is determined that homeowners qualify and are accepted into the HAMP program, they are given a probationary period, typically three months or more; if they perform adequately through the probationary period, the homeowners’ loan modification can be made permanent.

Although the goal through 2011 was to reset as many as 3,000,000 mortgage loans, the number of permanent HAMP modifications that actually occurred nationwide was 880,000 (about 15,000 in Pennsylvania).  Approximately 1,700,000 entered the HAMP program, but 737,000 failed to qualify for permanent modification.

There are other programs to assist foreclosed borrowers who may not qualify for HAMP.  They have assisted approximately 320,000 homeowners to modify their loan payments to avoid foreclosure sales.

Borrowers of modest means were lured into buying homes they could not really afford with loans that had very small monthly requirements in the early years and then escalated dramatically.  A family of modest means with three small children who might be relegated to the streets provides substantial motivation to the JPT to assist in an amicable resolution.  On the other hand it does no one a favor to modify a loan where a new default will be inevitable within the three-month probationary period.

— Ken Butera

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