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Cramdown Coming?

The Home Affordable Modification Program -- designed to reduce homeowners’ monthly mortgage payments and to keep them in their homes -- has been an abysmal

Jul 31, 2020
The Home Affordable Modification Program — designed to reduce homeowners’ monthly mortgage payments and to keep them in their homes — has been an abysmal failure. Back in January, my colleague Mary Kane reported that the program showed signs of falling far short of its goals. It has continued to do so throughout the year, kicking out far more homeowners than it has helped to permanent modifications. And even the permanent modifications themselves have been lackluster. Many homeowners re-default. Recently, I reportedon a family that went through the HAMP modification process only to find their monthly bill reduced by $37.96 a month.
Even the government’s own watchdog over HAMP — Neil Barofsky, the special inspector general over the Troubled Asset Relief Program — has blasted itas inefficient and ineffective at stopping the foreclosure crisis. He has also lambasted Treasury for sexing up its statements about the program:
Treasury clings to its prior statements that it plans to offer trial modifications to three to four million homeowners, a measure that SIGTARP has previously shown to be essentially meaningless. Treasury’s refusal to provide meaningful goals for this important program is a fundamental failure of transparency and accountability that makes it far more difficult for the American people and their representatives in Congress to assess whether the program’s benefits are worth its very substantial cost.
But now, James Pethokoukis reports at Reuters, the Obama administration might be pushing for a very, very big improvement to HAMP indeed. Rather than modifying mortgages, the Obama administration might instruct Fannie Mae and Freddie Mac to write down the mortgages, reducing the principal rather than the monthly payments:
Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages — one in five — are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.
He describes the timing as political:
The president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.
The question is whether this really is a good move politically if housing has stabilized. It will be expensive, very, very expensive. And my guess is that Republicans would love to campaign on this, easily and rightly characterized as a mass taxpayer bailout of underwater homeowners. For that reason, I would be surprised to see the administration do it. Forcing the banks to enact cramdown or changing bankruptcy laws would be one thing. But doing this through Treasury, politically, would be quite another.
Camilo Wood

Camilo Wood

Camilo Wood has over two decades of experience as a writer and journalist, specializing in finance and economics. With a degree in Economics and a background in financial research and analysis, Camilo brings a wealth of knowledge and expertise to his writing. Throughout his career, Camilo has contributed to numerous publications, covering a wide range of topics such as global economic trends, investment strategies, and market analysis. His articles are recognized for their insightful analysis and clear explanations, making complex financial concepts accessible to readers. Camilo's experience includes working in roles related to financial reporting, analysis, and commentary, allowing him to provide readers with accurate and trustworthy information. His dedication to journalistic integrity and commitment to delivering high-quality content make him a trusted voice in the fields of finance and journalism.
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