September 13th, 2012
Econintersect: The government's mortgage modification plan has been less than a success. With an objective of modifying 3-4 million mortgages, HAMP (Home Affordable Modification Program) enacted in 2009 has only completed 1.2 million. A study has been published that documents why there has been such a shortfall.
This study was not done by a couple of light weights: the participants came from the Federal Reserve Bank of Chicago, the Office of the Comptroller of the Currency and four leading universities. (Full list later.)
Major conclusion: The largest banks were not staffed or organized to deal with mortage modifications on a large scale, even without HAMP.
The study concluded that about 800,000 homeowners who should have been processed for mortgage modifications were not because of processing confusion delays and errors. The potential total (2 million) would still have been far less than the program objectives, but 1/2 to 2/3 of goal would have been much better than only 30-40% that actually happened.
Here is the list of researchers who prepared the report:
- Sumit Agarwal, National University of Singapore; Federal Reserve Bank of Chicago - Economic Research
- Gene Amromin, Federal Reserve Bank of Chicago
- Itzhak Ben-David, Ohio State University - Fisher College of Business, Finance Department
- Souphala Chomsisengphet, Government of the United States of America - Office of the Comptroller of the Currency (OCC)
- Tomasz Piskorski, Columbia Business School - Finance and Economics
- Amit Seru, University of Chicago - Booth School of Business and NBER
Here is the abstract of the research report from SSRN (Social Sciences Research Network) - emphasis by Econintersect:
The main rationale for policy intervention in debt renegotiation is to enhance such activity when foreclosures are perceived to be inefficiently high. We examine the ability of the government to influence debt renegotiation by empirically evaluating the effects of the 2009 Home Affordable Modification Program that provided intermediaries (servicers) with sizeable financial incentives to renegotiate mortgages. A difference-in-difference strategy that exploits variation in program eligibility criteria reveals that the program generated an increase in the intensity of renegotiations while adversely affecting effectiveness of renegotiations performed outside the program. Renegotiations induced by the program resulted in a modest reduction in rate of foreclosures but did not alter the rate of house price decline, durable consumption, or employment in regions with higher exposure to the program. The overall impact of the program will be substantially limited since it will induce renegotiations that will reach just one-third of its targeted 3 to 4 million indebted households. This shortfall is in large part due to low renegotiation intensity of a few large servicers that responded at half the rate than others. The muted response of these servicers cannot be accounted by differences in contract, borrower, or regional characteristics of mortgages across servicers. Instead, their low renegotiation activity — which is also observed before the program — reflects servicer specific factors that appear to be related to their preexisting organizational capabilities. Our findings reveal that the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such polices.
- Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program (Sumit Agrawal et al, SSRN, 29 August 2012)
- Foreclosure Fail: Study Pins Blame on Big Banks (Paul Kiel, Pro Publica, 11 September 2012)