Usually the biggest problem with federal programs is a lack of cash, but that’s not the case with the government’s ideas for mortgage borrowers who have run into rough times. In fact, it turns out that government foreclosure prevention programs have a $20 billion surplus — money some on Capitol Hill now want for such things as road and bridge repairs.
The government had set aside $29.78 billion to fund the “Making Home Affordable” programs that include HAMP and HARP but as of July 1st it had spent only $11.28 billion. A total of $7.6 billion was earmarked for the “Hardest Hit Fund” but only $5.22 billion has been spent. That leaves more than $20 billion sloshing around government coffers, a sum which some in Washington now want to spend for infrastructure improvements, what used to be called “public works.”
There is a certain logic to the Capitol Hill suggestion that as much as $5 billion should be taken from anti-foreclosure efforts and “re-purposed.” It’s hard to argue that the nation’s roads, highways and public buildings are not in need of repair when whole pieces are falling down. This week, for example, I-10, the major road between Phoenix and Los Angeles, was closed because of a bridge collapse, according to the Associated Press. The span — which usually serves 27,000 cars a day — was washed away in a flash flood.
What’s scary about the Cali Bridge disaster is that this was one of our better bridges! On its last inspection it scored 91.5 for safety out of a possible 100. Look around at your nearby roads, tunnels, levees and commuter trains and you will quickly realize that we are all playing infrastructure roulette, hoping it won’t be our turn when the next disaster hits.
The American Society of Civil Engineers says that it will take $3.6 trillion to bring America’s infrastructure up to par. And bridges, amazingly, are actually in better shape than most other parts of our physical plant. Bridges get a “C+” rating according to the ASCE while such things as roads, schools, drinking water systems, dams, and airports show only a “D” on their report cards.
So, yes, the idea of using foreclosure prevention money for a new and better purpose surely has some merit. The government needs to spend more on infrastructure and if federal funds set aside to help homeowners are not being used then beefing-up the nation’s bridges, roads and such is surely a good idea.
The alternative question is this: Why is that the nation’s homeowners have passed up $20 billion in federal funds, money that millions of people could have used to save their homes from foreclosure?
Making Home Affordable
The mortgage crisis hit most visibly in 2007 when foreclosure starts rose 75 percent. The country was simply unprepared for the massive increase in real estate failures and there was good reason for this, the assumption that the housing sector would never return to the harsh times of the Great Depression, an assumption based on the low level of foreclosures seen year-after-year for decades on end.
Early efforts to deal with the problem were a complete flop. The “FHA Secure” program of 2007 resulted in 4,100 new mortgages with better terms while the 2008 “Hope For Homeowners” effort refinanced a total of 71 homes. These results were achieved at a time when millions of foreclosure notices were going out annually.
In 2009 the government launched the “Making Home Affordable” effort which had a rocky start and then evolved into something which to date has resulted in 2.3 million loan modifications.
The major programs under Making Home Affordable include HARP (the Home Affordable Refinance Program) and HAMP (the Home Affordable Modification Program). In basic terms, HARP is designed to help people who have good finances but cannot refinance because their property lacks equity while HAMP is for individuals who have seen a major income decline or a massive increase in expenses, say from suddenly higher mortgage payments.
More than seven million homes have been foreclosed since the start of the toxic loan era, so why is it that more homeowners have not sought help from federal programs? After all, the money is plainly there and if homeowners can avoid foreclosure that’s also good for lenders, neighborhood home values and local tax collections.
Three reasons stand out:
First, the early Making Home Affordable programs were not as good as they are today. For instance, HARP program originally had a cap on just how much negative equity was allowed, a cap that has since been dropped. Also, owners could not originally get help with second homes and investment properties with two to four units. Now they can.
Second, there are general time barriers for both HAMP and HARP. With HAMP you must have “obtained your mortgage on or before January 1, 2009,” while with HARP the “mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009.”
Third, HARP and HAMP are scheduled to expire at the end of 2016. The deadline has been pushed back several times and it may be that some borrowers thought the program had lapsed.
There are several steps that can be taken which could substantially improve the Making Home Affordable programs and related efforts before their funding is lost.
The 2009 deadline for qualified loans is an artificial benchmark that bars large numbers of troubled borrowers from federal assistance. Why is a homeowner who financed in January 2010 and saw local home values plummet is somehow less worthy of government help than a borrower who financed a few months earlier?
The programs can be expanded. For instance, The Oregonian reports that 181 local families have avoided foreclosure by using money from the Hardest Hit Fund to purchase homes in areas where property values remain severely depressed. The former owners then buy back the properties at a discounted value. Between the lower value and the lower rate the homes become instantly affordable and foreclosures are avoided.
Lastly, it should be said that now is a good time to re-think spending goals for the housing sector. Foreclosure starts are at a 10-year low according to RealtyTrac, so the need for foreclosure prevention programs has surely declined. If money set aside for foreclosure avoidance plans is not being used then why not spend the cash for infrastructure? Not only are repairs widely needed, but the nature of infrastructure repairs requires large numbers of local employees, and higher employment levels are one sure way to strengthen the housing market.