"[W]e are at risk of repeating the same policy mistake that got us into this mess."
—Former chief credit officer of Fannie Mae Ed Pinto.
June 24th, 2010, Fairfax, VA—New testimony before a House oversight committee today revealed that a $75 billion Treasury program modifying mortgages has fallen well short of its goal to "help as many as 3 to 4 million struggling homeowners avoid foreclosure."
The testimony, delivered by former chief credit officer of Fannie Mae, Ed Pinto, before the House Oversight and Government Reform Committee, outlined several government causes for the program's failure, which Pinto said would only "yield about 275 thousand successful long-term modifications, with perhaps another 100 thousand successes from future trial modifications."
Pinto said there would be a 40 percent re-default rate for the attempted 340 thousand active permanent modifications. He also cited another 468 thousand active trial modifications, of which "perhaps only 75 thousand will become successful long-term permanent modifications."
Americans for Limited Government President Bill Wilson today said, "At best, the Treasury program will hit 9.4 to 12.5 percent of its original goal. For a $75 billion program, that's a remarkable, tragic failure. Put another way, it cost approximately $200 thousand for each of the 375 thousand modifications for the money that was allocated. What a waste."
Pinto said that the Treasury program "hopelessly tied the modification process up in knots" noting that private sector modifications had been rising rapidly in 2008 and the first quarter of 2009, until the program "reversed the upward trend in the numbers of modifications."
Pinto noted that under the private sector modifications, "[r]e-default rates after three months dropped by more than half from 35.1 percent in [the 4th quarter of 2008] to 14.7 percent in [the 3rd quarter of 2009]." He said, "This success was before HAMP [Home Affordable Modification Program] permanent modifications had any impact."
After the Treasury program was implemented, the number of overall modifications dropped, and applications were sat on for months as servicers attempted to ascertain if applicants qualified for the program 800 separate requirements. In the meantime, these applicants were put into trial modifications, which Pinto called "no doc modifications" since "[b]orrowers were allowed to enter a trial without qualifying on the basis."
According to the Wall Street Journal's James Haggerty, "Eager for quick results, the Obama administration last year prodded banks to start people on trials without first obtaining documents proving they were eligible. That has led to many crushed hopes… While awaiting answers, some borrowers keep making payments, exhausting their savings in what may be a futile effort to save their homes. They also incur fees from the banks and delay taking action that might give them a fresh start in a more affordable home."
Pinto said the slow process for approval encouraged the Treasury to weaken the standards for modifications, creating "alternative modifications," which were for properties with less than 80 percent loan-to-value wherein mortgage payments were reduced to below 20 percent of a borrower's income, and "the net present value test is no longer a constraint."
Pinto said, "Once again servicers are being required to re-evaluate the same borrower for the umpteenth time, but now the message is approve no matter the cost. This appears to be an attempt to paper over the problems resulting from HAMP's clogged pipeline."
Pinto noted that with the alternative modifications, "we are at risk of repeating the same policy mistake that got us into this mess," citing government-mandated looser lending standards and Department of Housing policies that "made it difficult to turn down unqualified borrowers for a loan."
Pinto also testified that other unintended repercussions of the Treasury program included strategic defaults, pointing to research by the University of Chicago and Northwestern University that stated, "With more and more homeowners believing that lenders are failing to pursue those who default on their mortgages, there is a risk that a growing number of homeowners will walk away from their homes even if they can afford monthly payments."
Pinto also blamed the Treasury program for forestalling a market correction. "HAMP has also slowed down foreclosure processes, pushing the level of heightened foreclosure activity out to 2013 or 2014 and likely extending the period for the market to correct."
Wilson concluded, "The only positive that can be drawn from Mr. Pinto's testimony is that it appears the Treasury modification program is winding down. The Treasury program was just a big lie to pretend to 'prevent' foreclosures, when there will likely be another 4 million foreclosure filings this year. It's time for government to get out of the way and let the market correct itself."
Testimony to House Oversight and Government Reform Committee, Edward J. Pinto, June 24th, 2010