While Republicans and Democrats largely agree that the government's Home Affordable Modification Program (HAMP) is a failure, the two sides disagree sharply on what to do about it.
Democrats are calling for the Obama administration to take further steps to increase loan modifications and prevent foreclosures, while many Republicans would like to end Hamp early, before its scheduled demise at the end of next year.
But any changes are likely to be tough to enact, observers said, making it more likely Hamp will simply run its course until it expires.
"It's going to be a steep hill to climb, simply because of the divergence of opinions," said Bill Killmer, senior vice president of legislative and political affairs for the Mortgage Bankers Association. "The chances of something happening depend on the administration weighing in."
The Obama administration maintains that HAMP is a success, noting it has helped provide 521,630 permanent modifications by the end of last year.
But when the program started operation two years ago, the administration set a goal it would help three million to four million homeowners.
According to Treasury Department statistics released last week, the program has also canceled 58,020 permanent modifications and 734,509 trial modifications since its inception.
Both the Congressional Oversight Panel and Neil Barofsky, special inspector general for the Troubled Asset Relief Program, have issued reports declaring the HAMP initiative a failure.
"Today, Hamp appears to be under siege, with a chorus of criticisms from all points on the ideological spectrum growing more insistent and calls for termination or a dramatic restructuring gaining traction," Barofsky wrote in a report two weeks ago.
"The numbers are remarkably discouraging. … Given the current pace of foreclosures, Hamp's achievements look remarkably modest, and hope that this program can ever meet its original expectations is slipping away."
Lawmakers on both sides of the aisle agree, but have offered competing plans for how to address the situation.
Sen. Sheldon Whitehouse, D-R.I., has introduced a bill to let bankruptcy courts force servicers and homeowners to enter mediation before initiating foreclosure. Rep. Maxine Waters, D-Calif., plans to reintroduce her legislation to require servicers to take loss-mitigation steps before any foreclosure.
"As the foreclosure crisis continues … the administration's Home Affordable Modification Program — while well intentioned — has not succeeded in producing anywhere near enough modifications to stem the tide of foreclosures," Whitehouse said last week.
On the opposite end, Republicans, including House Oversight and Government Reform Committee Chairman Darrell Issa, have introduced a measure to end Hamp early.
But observers are pessimistic about the chances for either an overhaul or early shutdown of the program.
"Hamp itself expires in a year, so I don't expect it will be terminated," said Laurence Platt, a partner at K&L Gates. "I don't believe any legislative proposal that gives more than Hamp has any chance of passage."
As for why Hamp fell well short of expectations, several observers said the program was designed to fix the wrong problem.
William Longbrake, an executive-in-residence at the University of Maryland who helped develop the program, said it was targeted at loans that were defaulting because their interest rates rose. By the time the program got under way, however, many more delinquencies were due to rising unemployment.
"Right from the very beginning, the Hamp program was pretty narrowly designed," Longbrake said. "It just was not designed for the problem that has evolved into the unemployment problem. It was designed for the rate-shock problem. Not surprisingly, you didn't get the results the administration predicted."
But the program had its successes, Longbrake said.
"If you don't play the numbers game, some good things have come out," he said. "For example, there is some standardization on the information that has been collected."
Banks, however, appear to prefer their own modification programs to HAMP. According to Treasury data, banks have completed about 2 million loan modifications under their own proprietary programs. Observers said such programs will be the main source of assistance for homeowners.
"The proprietary modifications are based on the premise that it is in the investor's interest to modify loans in some way, that it makes little interest to foreclose if they can get a borrower back on their feet," Platt said. "Anything that goes beyond that and says 'We don't look at it in terms of the investor's interest but in the borrower's interest' is another way of saying the borrower has a right to breach a contract."
But Democrats remain skeptical of proprietary modifications. They have tried, without success, to push more forceful programs, including allowing judges to reduce mortgage principal in the bankruptcy process.
With Republicans now in control of the House, however, a renewal of that effort or new plans to mandate loan workouts are unlikely to be enacted. Similarly, efforts to kill Hamp outright are likely to fail.
Many said any move to squash Hamp would be a mistake.
"We should create alternatives," said Julia Gordon, senior policy counsel for the Center for Responsible Lending. "We should create ways to make Hamp better. But if we were to replace Hamp tomorrow, we would have nothing to replace it. If one-quarter of all mortgages in this country — if we let them work their way through the system — we are right back into a recession. That's just irresponsible and mean-spirited."
Killmer also warned against rushing to terminate HAMP.
"I understand the potential merits of [the Issa] approach, but at the same time you have to balance the needs of the consumer who is really trapped and the industry is hampered in what it might try to do given the persistent economic problems and the incapability of some borrowers to modify given they are so economically distressed," he said.
There are no shortages of other ideas to replace Hamp, however. The National Community Reinvestment Coalition has proposed that Treasury acquire portfolios in mass from banks at their current market value, modify the loans to 30- or 40-year fixed-rate mortgages and sell them back into the market.
"What we really need is a more comprehensive proposal to bail out homeowners who have been victimized by the predatory or unsustainable loans that were originated," said David Berenbaum, chief program officer for the NCRC.
But such a move would almost certainly bring fierce objections from Republicans.
Another alternative is a proposal floated by BlackRock that would attempt to address the issue in bankruptcy court.
"It deals with the borrower's entire financial picture, and restores order to the way debts get resolved," said Pete Mills, a principal at Mortgage Banking Initiatives.
"Creditors get what they bargained for when they extended the loans in the first place -- unsecured [debt] is discharged or modified before secured [debt]; junior liens before first liens. Under Hamp, everything is turned on its head and put on the back of the first mortgage holder."
Mills said the plan "makes sense for investors and borrowers because the mortgage restructurings you get out of it are far more sustainable."
Hamp is based on reducing the loan to debt ratio to 31% but it does not take into account unsecured debt. The BlackRock option, however, would call for unsecured loan holders and second-lien holders to take hits first before a first-lien modification.
Others are hoping that regulators could improve the situation on their own by establishing national servicing standards.
"You should force the lenders to force the servicers to document they have made every effort before a foreclosure," said Bruce Marks, chief executive of the Neighborhood Assistance Corporation of America. "The regulators could require that without any legislation."
But Marks is pessimistic that regulators will follow through. The administration and Congress will just let the issue drift, he said.
"I don't hold any hope to anything coming out of this," Marks said.
Observers also said the GSEs could fill the void.
The GSEs "should do a lot more," Gordon said.
"They should have set the standard for the industry for how to keep people in their homes. Instead they have set the standard for how to move toward foreclosure. They should be setting the standards for making modifications sustainable as possible. … in some ways what the GSEs were doing and Hamp was doing for private label loans has led to a lot of the problems we've seen borrowers encounter for different loans. There's just not consistency."
