Will Washington pull the plug on HAMP?

Introduction

The future of the Obama administration’s troubled $30 billion initiative to bail out beleaguered homeowners is on the line.

The question boils down to this: Fix it or kill it?

Republican Spencer Bachus of Alabama, who chairs the House Financial Services Committee, wants to kill the Home Affordable Modification Program (HAMP) and related efforts to stem the nation’s flood of foreclosures.

“It’s time to pull the plug on these programs that are actually doing more harm than good for struggling homeowners,” Bachus said in a statement announcing a Wednesday hearing and Thursday mark-up of a bill to end HAMP. “These programs may have been well-intentioned, but they’re not working and, in reality, are making things worse.”

Other critics of HAMP’s effectiveness say terminating the program isn’t the solution.

“The idea of just killing if off without replacing it with something that would work better for homeowners, I think is just irresponsible,” said Rebekah Cook-Mack, an attorney with the Foreclosure Prevention Project at South Brooklyn Legal Services, a non-profit in New York City.

When the Obama administration unveiled HAMP in early 2009, it announced a goal of permanently modifying 3 million to 4 million homeowners’ loans. But by the end of 2010, HAMP had produced just over 500,000 permanent modifications and spent only $1 billion out of the $30 billion earmarked for the program from the Treasury Department’s federal bailout money.

Neil Barofsky, the special inspector general for the federal bailout programs, told the Center for Public Integrity in January that HAMP had failed in part because loan servicers can earn more in fees from a foreclosure than from negotiating a permanent modification with a homeowner. “The program has hurt people,” Barofsky said. “It’s heartbreaking.”

Other problems: the Treasury Department is unable to force loan servicers to make trial modifications permanent or to crack down on their abusive practices, Barofsky said.

A Center for Public Integrity story in August detailed a whistleblower’s claims that Fannie Mae – chosen by the Treasury Department to administer HAMP – bungled its stewardship of the program, creating a bureaucratic swamp characterized by “mismanagement and gross waste of public funds.”

The Obama administration says it has taken steps to improve HAMP. It is also pressing on another front that may prove more effective in pushing banks and other loan servicers to help families stay in their homes.

In response to complaints that banks have used inaccurate and fraudulent paperwork to speed homeowners through foreclosure, some administration insiders are pushing for a $20 billion settlement that could force banks to reduce the size of homeowners’ debt, according to the Wall Street Journal.

Industry officials have objected to the principal write-down idea. A Bank of America mortgage strategist says it “would bring with it enormous costs that would far outweigh any potential benefits.”

Cook-Mack, who oversees a list-serv for consumer attorneys fighting to win mortgage modifications for their clients, argues that forcing banks to reduce homeowners’ principal balances “is important to the economic recovery and it’s the right thing to do. We’ve largely let the banks off the hook and forced homeowners to shoulder the burdens of poor regulation and the sort of Wild West lending practices that created this mess.”

A House bill to eliminate HAMP may be a mostly symbolic gesture by the Republican-led chamber. The legislation is unlikely to win approval from the Democratic-controlled Senate and would face a certain veto from President Barack Obama.

Michael Hudson is a staff writer at the Center for Public Integrity and author of THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America – And Spawned a Global Crisis.