Posts Tagged ‘darryl issa’

Underwater Homeowners & HAMP: The Huge Problem of Negative Equity

Most homeowners who receive assistance from the Home Affordable Modification Program remain deeply underwater. The average homeowner in HAMP owes $1.50 for every dollar of their home’s value. This puts them at a greater risk of “walking away.” even after receiving a modification.

Republican critics of the program, like California Representative Darryl Issa say “It defies common sense that taxpayer money is being used to pay banks to modify loans that are likely to default anyway.”  In his usual “the free market is the answer to everything” zeal, he went on to say “In cases where the loan changes could keep borrowers out of foreclosure, banks have a clear incentive to make changes without a need for public funds.” He’s written to Treasury secretary Geithner to call for an immediate end to HAMP.

Except banks’ track record of loan modifications pre-HAMP was even worse than their record with HAMP.  The problem with banks and loan modifications, whether they’re private or government subsidized is that banks have proven singularly unwilling to do the one thing that will correct this entire mess: write down principle.

While recent changes to the HAMP program include provisions for principal reduction,  like everything else about the program,  it remains voluntary. Moreover, HAMP is designed so that the banks only modify loans from which they can profit. The entire NPV test, which is the test that determines whether someone qualifies for a HAMP modification or not, is designed to test whether it would be more profitable for the bank to foreclose or modify.  You don’t have to be an economic genius to see that it favors homeowners who are underwater since foreclosing on those folks will cause the bank to take that immediate loss. The deeper the home is underwater, the less profitable foreclosing becomes.

Of course, you also don’t need to be an economic Einstein to see that it also makes sense to bring loan values in line with the values of the properties securing the loans. I mean, that would make perfect sense, right? How can someone have a $300k mortgage on a home worth $150k and actually call that a secure investment?

The bean counters at the banks, unfortunately, don’t have too much economic sense. They just look at the dollars and cents on the banks’ balance sheets and if they’re decreased in any way, well, the sky is falling. I am not going to argue that principle write-downs won’t affect the banks’ bottom line. Of course they will. However, it’s a bit like receiving your bank statement, which , through an error shows you have a million dollars instead of only a thousand dollars. Of course, you’d much rather pretend that there wasn’t an error, and bank of the basis that you have a million dollars to spend, or invest,  but at the end of the day, that million dollars doesn’t exist. It is  just $999,000 of funny money. Mortgages that far exceed the value of the homes upon which they are secured are just as much funny money as the million dollar account error is. 

The world works differently for banks than it does for the rest of us, though. For the banks, they can continue to play with funny money, while you won’t be able to even pretend you’re $999,000 richer than you actually are for very long.

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