Foreclosure sign in front of a large single family home
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A new federal government report says that more than 163,000 of the 600,000 or so homeowners who received permanent loan modifications under the Home Affordable Modification Program have redefaulted.

A total of $815 million of taxpayer money has been spent on loans that redefaulted, money primarily paid to the banks and loan servicers in incentives to modify those mortgages -- modifications that clearly weren't significant enough to keep those borrowers in their homes for the long haul.

We're From the Government, and We're Here to HAMP

The report's author is Christy L. Romero, the Special Inspector General for the Troubled Asset Relief Program. TARP was the federal government's bailout program for the country's biggest banks, created in the wake of the 2008 financial crash to stabilize the country's failing financial system. Romero is TARP's watchdog, there to make sure the federal government's bailout money is being spent wisely, and to make sure no one on the private-sector side is taking advantage of the program.

The Home Affordable Modification Program, or HAMP, was created in 2009 by the Obama administration to help stem Americans' losses from the the bursting housing bubble that set off the financial crisis, which combined to put millions of American homeowners into foreclosure while threatening millions more with the same fate.

HAMP allowed some mortgage holders who were underwater -- whose loan balances exceeded the value of their homes -- to refinance at lower rates. It also provided incentives to lenders to work with homeowners holding subprime mortgages to modify the terms of loans that were at risk of default.

Problems From the Outset

The money for HAMP came from TARP. So far, about $4.4 billion has been spent to help troubled homeowners. That $815 million spent on loans that redefaulted amounts to 18 percent of the total -- a not insignificant failure rate on the part of the lenders and borrowers.

Who should be held accountable for this? Romero is ready to hand banks and mortgage services the lion's share of the blame. According to her report: "For the substantial number of homeowners who redefault, their modification was not sustainable."

Not surprisingly, homeowners who received the worst deal on a HAMP modification were the most likely to redefault. According to Treasury's database ... the smaller the reduction in a homeowner's mortgage payments and overall debt, the more likely the homeowner was to redefault.


Specifically, the report shows that the majority of HAMP participants received monthly mortgage reductions of less than 10 percent, and 39 percent of them saw monthly reductions of less than 5 percent. When you're struggling -- which in the post-crash economy was and still is very common -- every little bit certainly helps, but a 5 percent or less reduction in your mortgage payment is just that: a little bit. Another key factor for redefaults: Homes that were still underwater even after the modifications.

Beyond that, the report points out, banks are apparently causing themselves and their borrowers further trouble by failing to properly administer the modifications:
Anecdotal evidence suggests that poor service by mortgage servicers contributes to homeowners redefaulting on HAMP permanent modifications. Through its Hotline, SIGTARP has received thousands of calls from the public regarding HAMP, many of them alleging mortgage servicer error and lack of communication or miscommunication.

What sorts of errors?
The circumstances homeowners allege include (1) servicer payment calculation or payment credit errors, (2) problems following a transfer of mortgage ownership or servicing rights, (3) lost paperwork, (4) dual tracking -- when a servicer moves ahead on foreclosure even while a homeowner is in the HAMP modification process, a procedure prohibited under HAMP guidelines, (5) a servicer not honoring a HAMP permanent modification, or (6) homeowners with a change in circumstance. Often there is some combination of these issues. Anecdotal evidence suggests servicers need more improvement.


Time for Some Changes

How does this affect the American taxpayer? Again, according to Romero: "Homeowners who receive a HAMP modification but end up losing their home to foreclosure ... are not being helped to keep their homes as TARP intended, and taxpayers lose the positive impact these funds were to provide for the individual family and the community at large."

What can be done? Under HAMP, there's no requirement that the banks return any money they've received for the redefaulters they've worked with.
Moving forward, that might be a better way to make sure banks took mortgage modification more seriously: Require clawbacks if the mortgages don't stay out of redefault for some prescribed period of time.

But should the banks have to have their feet held to the fire just to make loan modifications that actually help? Really, they should be doing it themselves, and deep down, everyone from Main Street to Wall Street knows this.

Of course, let's not forget that many people who signed up for big mortgages had no business doing so. They had a hand in the mortgage mess, too, as well as in the problems resulting from the attempts to fix it.

The bottom line? The report says another 88,000 homeowners have already missed a payment or two, and could be the next ones to default on their modified loans. The Treasury Department has already begun to make more changes to the program to help homeowners succeed, but the report has more suggestions.

We can only hope that improvements to HAMP will be enough, and in time, to keep too many more millions of dollars in taxpayer money from being paid to banks for failed attempts to help struggling Americans avoid foreclosure.

John Grgurich is a regular contributor to The Motley Fool. Follow his dispatches from the front lines of capitalism on Twitter @TMFGrgurich.

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48 Comments

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whitneygre

So--The banks got over 4 billion $ back on their failed mortgages from taxpayers, and the defaulting homeowners saved a few pennies on their payments. Sounds like redistribution FROM ordinary people TO the 1% bankers on Wall Street. Mmm..Isn't the redistribution supposed to be from the 1% to the little guys?

And then the government administrator says they just didn't give the defaulting home-owners enough money? Giving more money would just reimburse the banks more for their failed lending practices-- How long is Obama going to keep bailing out his buddies on Wall Street? Oh, yes--I know the answer to that one-- As long as he lets Goldman Sachs executives run the Treasury and Justice Departments.

August 04 2013 at 11:29 AM Report abuse rate up rate down Reply
imd89

Most of the orginal defaults were caused by giving the orginal loans to people who could not afford the houses in the first place. By reducing the down payments 10%, 5% or in some cases paying little to nothing down to get them into the homes that they could not afford otherwise.This created a artifical market with these people that never had the ability to pay for them in the first place.

Then the bottom falls out of housing & by restructuring the loans you think there will be a difference??? Now most of these people either have no job or one that pays them less if they have one it was & is a no win situation. Barney Frank made it worse by not admitting the problem when GWB tried to rein in freddie & fannie but was shot down in his efforts!!

August 02 2013 at 3:00 PM Report abuse +3 rate up rate down Reply
cozypaws

The bottom line is Either you can aford a house or you can't.

August 02 2013 at 2:44 PM Report abuse +2 rate up rate down Reply
joethightwad

Put this at the door of the Congress which has to approve all government expenditures. It was a license to steal for the banks. Re-financing a mortgage a miniscule amount with high certainty the applicant would fail to meet the new terms meant more fees and payments the bank keeps right up to foreclosure. If the modified loan is insured by the government, the bank pockets a risk free profit for the full value of the loan. Obviously the banks have friends in high places.

August 02 2013 at 12:58 PM Report abuse +1 rate up rate down Reply
mjchiara

The "bailout" artificially propped up a market should have been allowed to self-correct. If the market had been left to itself, the mortgage default rate would have been much worse, but it would have eventually resolved itself. Giving a 5 to 10 percent reduction to mortgage holders who spent way about their means to repay, lost their jobs and couldn't get them back after years, was a flimsy band-aid solution. It also gave consumers in default a false sense of security. They needed to make major life changes to learn to live within their means instead of expensive false hope that this would fix their problems. Now 27% of the beneficiaries of mortgage motifications are back to where they were. And with the job market still bad, that percentage will probably rise.

August 02 2013 at 12:30 PM Report abuse rate up rate down Reply
cpo1514

will this Phony President count the defaults as another 'sold home' ?

August 02 2013 at 12:22 PM Report abuse +3 rate up rate down Reply
browse62

I guess when a bank negotiates a mortgage with a homebuyer the bank should not be expected to hold the homeowner respsonsilbe for abiding by the terms of the legal agreement (mortgage) if the homeowner at some time in the future finds it difficult or impossible to pay. Instead, the bank, meaning its sharelholders, should subsidize the homeowner and not move forward with the totally legal foreclosure. The government, as usual, is sticking its nose into something it has no legal right to be invovled in, i.e. the mortage agreement negotiated between the bank and the home buyer, If we let this socialistic, almost Communistic type of government behavior to continue, i.e. requiring banks to modify and/or forgive part of the mortgage debt in this consumer leqal agreement, what's to stop the government in interfering in other legal transactions between businesses and their customers? It has been proven to have been a bad idea for the government to establish Fannier Mae and Freddie MAC. The jackassess elected to Congress need to stop looking for ways to social engineer this country through legislation and get out of the private economy.

August 02 2013 at 11:35 AM Report abuse +3 rate up rate down Reply
mac2jr

Someone posted this to one of my comments "What do you think caused the financial meltdown? It wasn't the loans. IT WAS THE DEFAULTS!!!"

This person failed to do his or her homework and fails to understand the cause and effect of President Bush's 'dumping' of tens of thousands of HUD homes on the market in the 2001-2004 period. These HUD homes were offered in 'As is' conditions to potential homeowners for two weeks, and then to 'ANY' builder, Flipper, investor, etc. PA was swamped by NY'ers, Florida was swamped by criminals, all buying up these HUD properties at pennies on the dollar. These people then 'flipped' the homes for a profit of 5 to 25% and used the money to buy another HUD home, etc. etc. until they had enough to start buying non-HUD homes, like new Condos in Florida. They then 'flipped' these homes until the prices got so high that even they, the flippers, could no longer afford to purchase, at this time they stopped buying, and stopped paying on already owned homes, they walked and stuck the mortgage companies with billions of worthless paper, which lead to the mortgage collapse.

Now, by their actions, the market was overheated, and the media stroked the fire, and people that were unsophisticated buyers purchased much of this 'HUD' junk thinking they were finally getting their lifelong dream answered, soon found themselves with tens of thousands in repair bills, and homes not worth half of what they paid.

Who is to blame, the banks and mortgage companies for not doing their jobs, that's who..

August 02 2013 at 11:27 AM Report abuse rate up rate down Reply
amessci

You need to look at the servicing companies more harshly. I have been given to a company called Greentree Servicing. Upon looking deeper into this company I have found that there are multiple lawsuits in regard to the way they do business via communication and applying your funds. I work with someone who is under one of these govt. programs to which she pays the state. Well Greentree is not applying the funds properly and stating to her that her Mortgage is always late. I know in my own case that all i get is threatening phone calls and charges when all I want to do is pay my mortgage. They don't do right with your escrow and insurance either. I wasn't late but by their standards I was after the first of the month and called me at least 15 times a day and even called my neighbor looking for me. I can't wait till someone steps in. So they need to look at these loan servicing companies to make sure they do right by the consumer. Its government they just piss their money away with little oversight.

August 02 2013 at 10:45 AM Report abuse +1 rate up rate down Reply
Jo

"Who should be held accountable for this?"

How about fools who didn't do their math or consider a change in their fortune before they bought a house or students who racked up tens of thousands in school loans knowing they can't possibly pay them back,

Responsibility starts with the consumer - the one who sought out a backer for their pipe dream.

Then Fannie Mae and Freddie Mac who, along with all your favorite politicians, pressured banks to issue subprime loans

August 02 2013 at 10:17 AM Report abuse +2 rate up rate down Reply
1 reply to Jo's comment
Bill

Just as with alcoholics and addicts, enablers are also a problem. In this case the enablers are called banks and mortgage companies. Yes there are consumers who live beyond their means, but what ever happened to banks/mortgages companies saying "I'm sorry sir/madam, you don't make enough to afford your requested mortgage."?

August 02 2013 at 10:49 AM Report abuse +2 rate up rate down Reply
1 reply to Bill's comment
Beautiful

Banks were threatened and coerced into loaning money to unqualified individuals by the government. Obama is pushing for more of the same, as ownership is at an 18 year low.

August 02 2013 at 12:43 PM Report abuse +1 rate up rate down