This is my first diary. I'd been thinking about writing a diary for a long time, and I always put it off. The reasons were probably common to many of you---"It is for somebody else to do." "I am too busy." "I've got nothing different to say." Then I realized that, as a consumer lawyer, I have a little different view on the economy and the major issues being debated at the local and national level. As a lawyer, you often have an opportunity to dig deep into issues of race, poverty, and economic exploitation. So here we are...
My first diary is about President Obama's loan modification program. It's called the Home Affordable Modification program or HAMP, and by all accounts it is not working. The question is why? There are a myriad of little reasons, but I think there is one big reason: accountability.
Obama created a loan modification program with no transparency and no oversight. The loan modification program is built upon a thing called the "Net Present Value" calculation. The problem is that the government and lenders won't tell anybody what the calculation is, making it the largest government program in which nobody knows the specific elements needed to qualify. Now, Congress is finally holding a hearing on the issue...it's about time.
Here's a little bit of background. HAMP operates like this. There are five basic criteria to be eligible for a HAMP loan modification. First, it has to be your primary residence. Second, you need to be delinquent or at risk of being delinquent. Third, your monthly payment has to be more than 31% of your gross monthly income. Fourth, you couldn't have done HAMP once before and failed. Fifth, your mortgage has to be less than $729,750. Once you are eligible, then the loan servicer applies the Net Present Value calculation.
The "net present value" calculation or NPV is a calculation based on the FDIC's "loan mod in a box." The loan mod in a box was a uniform loan modification program created a few years ago to streamline the process of providing loan modifications. The calculation is supposed to determine whether it is in an investor's best interest to modify the loan now or allow it to go into foreclosure. Notice the emphasis here---it isn't about whether it is in the best interests of the overall economy, availability of credit, or local neighborhoods. It's based on what is in the best interests of the investors.
A loan servicer enters certain information, such as the homeowner's current income, principal balance of the mortgage, and the current value of the house into the calculator. The formula then evaluates whether a loan mod to 31% of the homeowner's income versus the cost of foreclosure. A "positive" means do the loan mod, and a "negative" means do the foreclosure. Within the formula itself, there is a foreclosure discount rate (the amount of discount a lender will have to apply in order to sell the property quickly) as well as a default rate (the liklihood that the person will default even after getting the loan mod).
The problem is two-fold. First, the calculator is a secret. The Treasury Department will not reveal the standard NPV calculator to the public. So, a HUD certified housing counselor, a homeowner's attorney, or even a homeowner cannot just pull up a website and punch their information into the computer and see if it is positive or negative. That means all the power is with the servicers. Mistakes happen, and this simple bit of transparency is not available.
With every calculation there is a tipping point, being $50 off on your income can be the difference between a loan mod and foreclosure. The same goes for the value of the house. Lenders are loathe to disclose what they believe the house is worth. For a long time, a homeowner wasn't given any information about the data used for the NPV calculator. Now, the homeowner supposedly will get some....but not the value of the house. In a country wherein 25% of homeowners are seriously underwater, this is just bad public policy. Lenders don't want to book an immediate loss on these properties. They want to hide their losses, and this failure to provide transparency allows them to do it.
The second big problem is that nobody knows what "default rate" the government and the lenders are using, whether it is accurate, and whether it will hold-up to scrutiny by economists and housing experts. If the lenders are using historic default rates for loan mods, that is crazy---since historically loan mods did not reduce the monthly payment. In the past, lenders just forgave or capitalized the past-due amounts. This is another area where the Treasury Department failed to represent the people and instead remained captured by the industry it purportedly regulates.
If HAMP is going to be successful, we need to open it up. Obama needs to be FDR and lead, rather than fear Wall Street. Participation needs to be mandatory for HAMP, not voluntary. Then Congress needs to give homeowners a private right of action to go into court and stop a foreclosure that is being done in error.