Posted: December 28, 2009.
By Professor Jean Braucher
Jean Braucher is the Roger C. Henderson Professor of Law at the University of Arizona James E. Rogers College of Law. This article is based on a longer paper, available for free at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1518098).
The Obama Administration originally envisioned bankruptcy modification as a companion to HAMP. The House passed a bill to achieve that goal, only to see it stall in the Senate. An attempt to get the legislation moving again in the House failed on December 11, but the more problems with HAMP become apparent, the greater the chances that bankruptcy modification might ultimately be enacted.
Low quantity. Only 31,382 modifications were made permanent in the first eight months of HAMP, which became operational last April and committed $75 billion to help three to four million borrowers avoid foreclosure. In response to these poor results, Treasury launched a “Conversion Campaign” to get as many as possible of another 697,026 pending trial plans converted into permanent ones.
Comparing the permanent modifications at the end of November to the 386,865 trial plans at the end of August (giving them three months to become final), the conversion rate has been about eight percent, equivalent to chances of a college applicant getting into Harvard or Yale.
A Treasury official used police and military rhetoric to describe its campaign: “SWAT teams” of Treasury staff are now “imbedded” at servicers in an “escalation process.” So if you have clients who could benefit from HAMP modifications, now is a good time to contact the program’s “Hope Hotline”: 1-888-995-HOPE (4673).
Treasury also acknowledged persistent accounts of servicers “losing” documents and asks borrowers and their counselors to report program violations. That’s another action item for you if you have clients who have been given the runaround. Other servicer violations should also be reported, such as conducting foreclosure sales while reviews or trial plans are in progress, charging for evaluation, or offering noncomplying plans that are more expensive than HAMP calls for. Gross monthly mortgage payments are supposed to be reduced to 31 percent of gross monthly income. Any of these practices could make a good basis for state Unfair and Deceptive Practices (UDAP) actions, typically carrying statutory damages and attorneys’ fees.
Low quality. Principal reduction is not required under HAMP and is rarely given. Three-quarters of borrowers are left underwater, often seriously so, with the principal obligation on average at 137 percent of the home’s current value, according to the Congressional Oversight Panel report last October. Borrowers who later lose income are stuck, unable to sell and pay off the loan or refinance. Temporary interest rate breaks are the way affordability is achieved, without principal reduction, and that creates high risk of redefault, especially given high unemployment.
The Obama Administration originally envisioned bankruptcy modification as a companion to HAMP. The House twice passed bills to achieve that goal, only to see them stall in the Senate. An attempt to get the legislation moving again in the House failed on December 11, but the more problems with HAMP become apparent, the greater the chances that bankruptcy modification might ultimately be enacted.
Alternatively, HAMP’s guidelines could include principal reduction as a standard tool when needed to keep borrowers in their homes, something Treasury could implement itself. As is, many HAMP modifications are not going to be sustainable.