Wednesday, October 21, 2009
The Congressional Oversight Panel has released its October Oversight Report: An Assessment of Foreclosure Mitigation Programs After Six Months. The Panel, chaired by Elizabeth Warren, is charged with reviewing "the current state of the financial markets and the regulatory system" and with oversight of federal programs related to the mortgage and financial crises. The executive summary of the report begins:
From July 2007 through August 2009, 1.8 million homes were lost to foreclosure and 5.2 million more foreclosures were started. One in eight mortgages is currently in foreclosure or default. Each month, an additional 250,000 foreclosures are initiated, resulting in direct investor losses that average more than $120,000. These investors include the American people. The combination of federal efforts to combat the financial crisis coupled with mortgage assistance programs makes the taxpayer the ultimate guarantor of a large portion of home mortgages.
It concludes that the programs--particularly the Home Affordable Modification Program (HAMP)--as currently configured are too constrained in scope, scale, and permanence to achieve the goals of the Emergency Economic Stabilization Act (ESSA) in reducing the impact of the mortgage crisis.
The Manhattan Institute's Nicole Gelinas analyzes the report in City Journal with Our Subprime Federal Government: President Obama's mortgage plan imitates the lenders who inflated the housing bubble.
The analysis shows that the Treasury, in trying to keep people in homes they can’t afford, is relying on the same perverse principle that inflated the housing bubble in the first place: namely, that it’s fine to borrow recklessly to buy a house, because house prices can only go up and up.
Gelinas argues that HAMP in particular is counterproductive because it has only enabled homeowners to cut interest rates instead of principal debt for mortgage loans that are now "underwater" (i.e., the debt (original loan) is greater than the current market value of the property). In Gelinas's analysis, HAMP has provided temporary relief in monthly payments but it has actually increased the total debt of its borrowers and caused more loans to go officially underwater.
The Panel and Gelinas may both be right about HAMP's shortcomings. Their recommendations diverge (roughly put--Panel: more; Gelinas: less (Gelinas would favor encouraging lenders to forgive prinicpal)).
What I find to be even more problematic is the scale: under HAMP there have been fewer than 2,000 workouts so far (1,711 according to the Panel). So whether the Panel is right in asking for more, or Gelinas is right that even these < 2,000 workouts have been counterproductive, it seems that this paltry number can't have much effect on the overall economy. I understand that the government can't just pull a chain and magically modify millions of mortgages--such an individualized, case-by-case, fact-intensive program like this can't automatically handle massive amounts of cases. But 2,000 mortgage modifications, while perhaps providing important relief to those homeowners, can hardly reverse the tide of the mortgage crisis. The Panel report indicates a Treasury goal of between 2 and 2.6 million modifications--it's unclear to me how the program can ramp up from two thousand to two million, so if you have better information than I do, please leave a comment. Even at this number, the Panel estimates 10 to 12 million foreclosures, so either the Panel is right that the program needs a massive upgrade, or Gelinas is right that we should abandon the effort and focus more on mortgage principal rather than temporary modification of interest rates that perhaps makes bad mortgages worse and potentially re-inflates the bubble.