The Congressional Oversight Panel, which was tasked with evaluating the federal foreclosure mitigation program, has found that the Making Home Affordable plan has done little to help individual homeowners and, in many cases, has just prolonged their pain.
The panel's report, released Wednesday, says that Treasury's programs have three fundamental flaws:
First, because the Treasury has rolled out a variety of increasingly generous measures, banks have little reason to modify mortgages now, since there may be better government incentives down the road if they wait.
Second, the panel says that the program's results demonstrate that reducing mortgage payments is not a sufficient solution for many homeowners. Even after securing loan modifications -- which fewer than 200,000 families have done, at last count -- large numbers of homeowners are still struggling to make payments. Meanwhile, if a house was under water before the modification, it will still be under water after a modification, assuming the outstanding principal on the loan is not reduced.
Finally, the panel is concerned that the programs are blowing through more than the allotted funding set aside for foreclosure prevention.
Congressional Oversight Panel Chairwoman Elizabeth Warren said in a video that the crisis is not showing signs of abating and that the Treasury's response is lagging behind the problem.
"For every family the Treasury has helped into a sustainable mortgage modification, 10 other families have lost their homes," said Warren.
Indeed, foreclosures are still rising on a year-over-year basis,
The housing problem is exacerbated, no doubt, by the fact that roughly two years after the economy succumbed to the financial crisis, unemployment is still lingering at 9.7%, and there's little confidence that the country will see substantial job growth any time soon.
Banker's Response: Principal Reductions Make Mortgages Too Risky for Banks
In the meantime, banks have been extremely slow and resistant to government measures to stem the foreclosure crisis, and lenders are skeptical about proposals to help homeowners reduce the principal balance on underwater homes.
In testimony Tuesday before the House Committee on Financial Services, David Lowman, the head of JPMorgan Chase's (JPM) home lending business, said reducing principal debts would be a wasted effort and potentially harmful to the mortgage business.
"Like all loans, mortgage contracts are based on a promise to repay money borrowed," he said. "If we rewrite the mortgage contract retroactively to restore equity to any mortgage borrower because the value of his or her home declined, what responsible lender will take the equity risk of financing mortgages in the future? What responsible regulator would want lenders to take that risk?" Lowman asked.
Lowman also made the mistake of encouraging homeowners who feared foreclosure and weren't getting any help from JPMorgan Chase to "come to him." Within moments, Lowman was mobbed by 50 borrowers (or protesters?) who thrust a document on Lowman which alleged JPMorgan had reneged on its offer to help homeowners, according to a Reuters report.
Panel: Foreclosure Prevention Program Isn't Working