Yesterday, administration officials stood alongside state attorneys general to announce a $25 billion mortgage settlement. It was reminiscent of a big announcement by administration officials three Februarys ago involving an even bigger number: $50 billion. That money was supposed to go to the administration's signature mortgage modification program, which eventually became HAMP.
Three years later, HAMP (the Home Affordable Modification Program) is widely considered a failure. That failure provides key context to yesterday's announcement.
According to the state attorneys general and the administration, a major selling point of the new settlement is that it won't repeat HAMP's mistakes. This deal, they say, is different.
"If people are eligible for a loan modification, the banks won't screw up those decisions anymore," said Iowa Attorney General Tom Miller.
North Carolina Attorney General Roy Cooper made a rather pointed reference to HAMP: "I think strong, court-ordered enforcement with teeth distinguish this deal from those earlier efforts to help homeowners."
As we've reported extensively over the past several years, homeowners seeking to avoid foreclosure by gaining a loan modification have often been frustrated by banks' errors and delays. In the worst cases, the banks' shoddy mortgage servicing has led to wrongful foreclosures. The errors have sometimes continued even after homeowners got an elusive modification.
When HAMP was launched, it came with the promise that mortgage servicers would have to abide by clear rules. The handbook laying out these rules now approaches 200 pages. But as we've detailed, enforcement of those rules has been lacking.
According to the state attorneys general, the settlement directly addresses that. The five big servicers — Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial (formerly GMAC) — that will sign on to the not-quite-finalized deal have agreed to follow a raft of new rules. Some of these rules, like how quickly a bank must respond to a homeowner's completed modification application, come straight from HAMP.
What's different this time, they say, is that there are clear consequences for rule-breaking. But plenty of questions remain, and only time will tell if the latest promises of mortgage-servicer accountability will be kept.
"The big picture is that these new rules are only good if servicers follow them," said Alys Cohen of the National Consumer Law Center. "Enforcement will really matter."
As critics like Firedoglake blogger David Dayen have pointed out, the new system relies to some extent on "self-assessments" by the banks to identify violations of the new rules. But Miller, the Iowa attorney general, notes that consumers will be able to complain to their state's attorney general, who will make sure their complaints are heard.
The settlement does create a "monitor" who will have the power to impose penalties. The administration says a bank could be fined up to $1 million per violation and up to $5 million for repeat violations. But the details released so far don't show how violations will be applied or counted. (If thousands of homeowners, for instance, have been wrongly denied modifications, will that be counted as one violation or thousands?)
HAMP came with no penalties for participating mortgage servicers that broke the rules. It was only in the past several months that the Treasury Department decided to address servicer noncompliance — by temporarily withholding the program's subsidy payments. (As for the millions of dollars in incentives that Bank of America, JPMorgan Chase and the other servicers were paid over the previous years, they get to keep that.)
The settlement is not only supposed to have more sticks than HAMP, it's also a chance for the administration to breathe life back into the old program. Treasury recently made major revisions to HAMP to allow more homeowners to qualify for modifications.
"The extension and expansion of HAMP are designed to be complementary to the settlement," said Treasury spokeswoman Andrea Risotto.
For instance, the program was set to end at the end of 2012 but now will accept new homeowners until the end of 2013. (The banks will operate under the umbrella of the settlement through 2014 or so.) In addition, Treasury has broadened some of the criteria to make it easier to qualify.
Some of the millions of homeowners who were rejected might be eligible for a second shot. Hundreds of thousands of homeowners were originally granted "trial modifications" through the program in 2009 and early 2010, only to be denied permanent modifications many months (and sometimes more than a year) later. Most of those homeowners started those trials by just giving their income information over the phone. They'll be eligible to reapply, according to the proposed rules.
One of the recent changes to HAMP could reduce the cost of the settlement for banks — and leave taxpayers footing a chunk of the bill.
As part of yesterday's deal, the five banks agreed to reduce billions in mortgage debt for homeowners in danger of foreclosure. Most of those principal reductions — about 85 percent according to Housing and Urban Development Secretary Shaun Donovan — will likely be for loans that the banks hold on their own books.
HAMP also has long offered investors incentives to encourage principal reductions. For loans owned by banks, the money goes right to them. In January, Treasury tripled those incentives. In cases in which a loan qualifies for HAMP, the government will now pay investors, often the banks themselves, up to roughly two-thirds the cost of a principal reduction.
The banks have agreed to perform at least $10 billion worth of principal reductions as part of the settlement. Because it's unclear how many of the principal reduction modifications will be done through HAMP, it's impossible to say how much of that will be covered by the government subsidies. (Update: On February 22, 2012, HUD published a blog post denying that HAMP subsidies could be used by banks to reduce the cost of the settlement. Servicers will “only receive credit for the portion of the principal reduction that they themselves pay for, not for the portion covered by incentives in the program,” HUD said. The terms of the settlement have yet to be publicly released.)
So far, about 40,000 HAMP modifications have been done through HAMP's principal reduction program at a median reduction of $67,196, meaning that roughly $2.7 billion in principal has been reduced. If the banks find HAMP more attractive because of the increased incentives, that amount might increase sharply, and HAMP could experience something of a renaissance.