Editor: David Reiss
Brooklyn Law School

March 15, 2013

Unhampered and HAMPered Mortgage Modifications

By David Reiss

The National Consumer Law Center has issued a thorough report, At a Crossroads:  Lessons from the Home Affordable Modification Program  (HAMP), which also provides some guidance for the way forward after we get past the foreclosure crisis.  The authors summarize their findings as follows:

The government’s Home Affordable Modification Program (HAMP) is our starting point. HAMP has reached more homeowners, and successfully modified more home loans, than any program in history. Created by the federal government in early 2009 as a temporary program in response to the foreclosure crisis, HAMP provided additional financial incentives to servicers and investors to modify mortgages at risk of ending in foreclosure. The result has been affordable, sustainable loan modifications that keep borrowers in their homes and maximize returns to investors. But HAMP fell short of its goals, which were inadequate to the scope of the crisis. HAMP has been justly criticized for its lack of transparency and its failure to provide for effective enforcement. (3)

Not pulling punches, the report squarely places responsibility for its failure on “one root cause: massive servicer noncompliance. Almost every official evaluation of HAMP has noted widespread servicer noncompliance and the concurrent failure of the U.S. Department of the Treasury (Treasury) to engage in meaningful enforcement.” (4)  Given that millions more foreclosures are on the horizon, this failure must be rooted out.

The report identifies five principles for effective loan modification standards:

  1. Loan modification evaluations should be standardized, universally applicable to all loans and servicers, and mandatory for all loans before the foreclosure process can go forward.
  2. Loan modification terms must be affordable, fair, and sustainable.
  3. Hardship must be defined to reflect the range of challenges homeowners face.
  4. Transparency and accountability throughout the loan modification process are essential.
  5. Homeowners must be protected from servicers’ noncompliance. Good rules on paper are not enough. (4)

I am intrigued by some of the particular proposals, although I am not sure how they actually work in practice.  For instance, the report states that “Provisions Must Be Made for Homeowners with Junior Liens and Others for Whom a Thirty-One Percent Monthly Mortgage Payment Is Not Affordable.” (58) At what point must we say that a particular situation is untenable?  The report also proposes that “A Servicer’s Violation of Servicing Standards Should Constitute a Defense to a Foreclosure.” (63) While this would no doubt be great for current homeowners, it would also be a radical role change for the foreclosure process.  If this idea gets any traction, it will be interesting to see the industry critique.


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