After the housing bubble burst in 2006, it ushered in the foreclosure crisis, with 5.5 million borrowers losing their homes to banks. Now that the foreclosure tidal wave has receded, most believe that the foreclose storm is over. Nationwide, foreclosure activity is down 9 percent from a year ago in July, according to RealtyTrac — the 47th consecutive month where foreclosure activity decreased annually.
But the foreclosure numbers could start to trickle upward starting in 2015. A new potential wave of mortgage trouble could threaten the shaky residential real estate market. In other words, the foreclosure crisis hasn’t receded; it was delayed. The can was kicked down the road. And next year, foreclosure activity could spike again.
Five years ago, when President Barack Obama traveled to Meza, Ariz. on February 18, 2009, along with Treasury Department secretary Timothy J. Geithner, HUD chairman Shaun Donovan and FDIC chairman Shelia Bair, to announce his signature housing recovery program, one in five borrowers owed more on their mortgage than their home was worth, banks were repossessing over 300,000 homes every month and home prices had tumbled 30 percent from their 2009 peak. The cornerstone of Obama’s flagship Making Homes Affordable Program was a loan modification plan named the Home Affordability Modification Program, or HAMP, and a refinance program, known as the Home Affordable Refinance Program, orHARP, which paid lenders an incentive fee for each modified loan.
“All of us will pay a steeper price if we allow this crisis to continue to deepen — a crisis which is unraveling home ownership, the middle class, and the American Dream itself,” Obama told an audience gathered at Dobson High School in Mesa, Ariz. “And we will pursue the housing plan I’m outlining today. And through this plan, we will help between 7 and 9 million families restructure or refinance their mortgages.”
But the HAMP program, which was designed to lower troubled borrowers’ mortgage rates to no more than 31 percent of their monthly income, ran into trouble almost immediately. Many borrowers didn’t qualify for the voluntary program. Many lenders lost documents. Many banks rejected millions of applicants. Extensive documentation scared off millions of other underwater borrowers.
Sadly, Obama’s housing fix faltered. It didn’t deliver on the vow to modify as many as 9 million delinquent loans. In the end, by July 2014, five years into the program’s operation, only 1.4 million borrowers had received a mortgage modification through HAMP — a far cry from the promised 9 million. And 350,000 borrowers defaulted again on their mortgages and were evicted from their homes.
“After almost five years, HAMP continues to face considerable challenges, including getting new homeowners into permanent mortgage modifications and keeping homeowners in those modifications from re-defaulting,” according to the latest SIGTARP report released July 30, 2014. “Through June 30, 2014, only 1.4 million homeowners have received a permanent HAMP modification, while servicers rejected more than 5.5 million homeowners from HAMP. Overall, only 1 in 6 homeowners that applied for HAMP received a permanent modification. Additionally, the number of homeowners entering HAMP has steadily declined from 512,712 in 2010 to just 141,920 in 2013.”
But things could get worse, the report said.
HAMP Re-Default Risk
“However, HAMP also faces a significant challenge of borrowers re-defaulting out of HAMP,” the report warned. “Already, 398,222 homeowners have not been able to keep up with their mortgage payments even though payments were lowered by HAMP. Overall 29 percent of homeowners in HAMP have already fallen out of the program. However, the bulk of homeowners in HAMP who started participating in the program in 2009 and 2010 are falling out of the program at ever more alarming rates. Approximately half of all homeowners who entered HAMP in 2009 have fallen out of the program. Homeowners who entered the program in 2010 have re-defaulted at a rate of 40 percent.”
Now the chickens are coming home to roost. Already, nearly 400,000 have re-defaulted on their HAMP modifications. Between now and 2021, almost 90 percent of the HAMP loan modifications will see increases in their mortgage interest rate, including almost 300,000 next year, according to the SIGTARP report. And with almost half of homeowners who got help in 2009 re-defaulting on their mortgages, we could see a spike in foreclosures in the next few years.
“The longer a homeowner remains in HAMP, the more likely he or she is to re-default out of the program,” according to the TARP report. “Re-defaults of the oldest HAMP modifications are at a 46 percent re-default rate, a rate that continues to increase as the modifications age.”
Nobody should be surprised. Neil M. Barofsky, the former special inspector general of Troubled Asset Relief Program, said in 2012 that Treasury Secretary Timothy Geithner had told him HAMP was not designed to help distressed borrowers, but was implemented to “foam the runway” for Wall Street banks by “stretching out foreclosures, giving the banks more time to absorb losses while the other parts of the bailouts juiced bank profits.”
Shelia Bair, the former FDIC chairman who attended HAMP’s unveiling in 2009, said in her 2012 book Bull By the Horns that the program was too rigid in its qualification requirements, arguing that the HAMP program was destined to fail.
“I cringed as he threw out what I considered to be wildly inflated numbers on the programs impact,” wrote Bair, referring to president Obama’s rosy pledge to help 9 million families modify their underwater loans. “To require every borrower to essentially prove that he or she could qualify for a new loan was stupid — the loan had already been made. And given the huge number of loans that needed to be reworked, as well as the problem of ill-trained, understaffed servicers, the cumbersome process was doomed to failure. HAMP wa a program designed to look good in a press release, not to fix the housing market. I don’t think helping home owners was ever a priority for them.”
Nevertheless, HAMP was to expire at the end of 2014, but the government has extended the program until December 31, 2015.
The program had so many problems getting started in 2009, with constant tweaks and revisions given to the banks, that only 30,000 HAMP modifications from 2009 remain active, according to Treasury Department data.
However, the modified interest rate lasts for only five years. The first higher payments will hit an estimated 30,000 HAMP homeowners this year, and the interest rate will go up one percentage point per year until it adjusts to the rate agreed upon at modification. The reset rates will range from 4 percent to 5.4 percent, according to a TARP Inspector General report. Half of all HAMP loan mods reside in just four states: California, Florida, Illinois and New York.
In the next two years, these interest rate adjustments made on mortgage modifications in 2009 will reset to higher rates and could cause additional defaults. If a homeowner cannot make the payment, they could lose their home to foreclosure.
With the economy still weak and unemployment and under-employment high, troubled borrowers may not be financially prepared for interest rates to slowly creep back up, increasing their monthly mortgage payments by hundreds of dollars.
Could a new foreclosure crisis be on the horizon?
What are your thoughts? Will foreclosure activity increase in 2015?