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Has HAMP been a failure?

 
Think Tank
Kristoph Kleiner,
 Ph.D.
Assistant Professor of Finance at Indiana University
Areas of research expertise include household finance, empirical macroeconomics, and real estate finance.

The Home Affordable Modification Program (HAMP) seeks to modify the terms of a distressed homeowner’s mortgage in order to make their monthly payments more affordable by lowering mortgage rates, lengthening terms and principal forbearance.

Originally advertised as a vehicle to help up to four million homeowners permanently modify their mortgages, HAMP has only permanently modified 1.3 million mortgages to date. Meanwhile, some 5.6 million non-HAMP loan modifications have been completed. But does that mean HAMP is a failure? What can be done to improve this government-sponsored program in order to increase its rate of success?

To find out, we asked Kristoph Kleiner, assistant professor of finance at the Kelley School of Business at Indiana University, to explain his thoughts on HAMP, its implementation, its struggles and how the program can be improved.

Q: Do you think the Home Affordable Modification Program has been a failure? What can be done differently to help distressed homeowners?

A: Before getting to the effects, I first want to explain why the Home Affordable Modification Program (HAMP) was implemented. Part of the Financial Stability Act of 2009, HAMP was intended to offer incentives for lenders and servicers who lower the interest rate and/or extend the term length on an existing mortgage.

Why do lenders and servicers need incentives in the first place?

Lender incentives

Let’s start with lenders. When deciding on whether or not to allow a loan modification, a mortgage lender considers the costs and benefits. The benefits are that the homeowner may now be able to pay the mortgage and not default in the future. The costs are that the borrower either still defaults after the modification or (could have self-cured without a loan modification). The problem is that the mortgage borrower knows his or her financial situation much better than the mortgage lender, and the lender may not be willing to deal with this risk.

Servicer incentives

Next, we move on to the servicers. A servicer may be distinct from the lender or might be the same institution. The servicer receives the monthly mortgage payments from the borrower and conducts mortgage workouts, modifications and the foreclosure process. The concern here is that if a servicer is distinct from the lender, the servicer does not internalize the costs of defaults and foreclosure. However, they do internalize the time costs of loan modifications.

HAMP results

With all this in mind, let’s look at the results.

Between 2009 and April 2014, the government states that HAMP has helped 1.3 million homeowners modify their mortgage, reducing monthly mortgage payments by a median of approximately $541 every month. While this is notable, we still face obstacles.

Obstacles remain

First, these numbers are still short of the self-set goal to assist up to four million homeowners. One potential explanation for the shortfall is the countless stories of borrowers who were still denied eligibility by servicers when they actually qualified. Secondly, about half of these modifications default after sixth months, only delaying the eventual outcome.

How do we solve the problem?

What we need are programs that can overcome the two obstacles mentioned: giving the right incentives to servicers and minimizing the risk faced by the lender. By focusing on the former, we can guarantee that qualified homeowners receive the modification; and by succeeding in the latter, we can truly clarify what “qualified” actually entails.