The federal approach to resolving the foreclosure crisis is at a crossroads. Legislation has been introduced in the Republican-controlled House of Representatives that would terminate the Treasury Department's Home Affordable Modification Program (HAMP). That program was unveiled in February 2009 with much fanfare as part of the TARP financial stability law enacted the preceding fall in response to the financial crisis. Increasing impatience on Capitol Hill with HAMP's ineffectiveness is reflected by possible Senate Judiciary Committee consideration of legislation by Senator Sheldon Whitehouse (D-R.I.) that would codify in law the authority of the U.S. bankruptcy courts to establish foreclosure mediation between debtors and creditors.
For industry experts who watched the federal response to the housing crisis unfold since 2007, disillusionment with the HAMP program by legislators is not surprising. Last year, the Congressional Oversight Panel (COP) created to oversee TARP declared HAMP a "failure." In testimony before a House committee on January 26, 2011, Neil Barshefsky, the Special Inspector General responsible for auditing TARP, called HAMP "anemic," noting that HAMP's "achievements look remarkably modest, and hope that this program can ever meet its original expectations is slipping away." Even as far back as July 2010, on a conference panel sponsored by Baker Donelson at the ALFN's annual convention in Washington, D.C., Treasury officials suggested that the Obama Administration planned to attach greater priority to foreclosure mediation. In November, the U.S. departments of Housing and Urban Development, Veterans Affairs and Justice followed with the joint release of a primer on the merits of mediation.
Most experts agree that HAMP suffers from inherent limitations that cannot be easily overcome. A combination of factors – mandatory participation only by servicers of loans owned or guaranteed by Fannie Mae or Freddie Mac, lack of penalties, fines and clawbacks for servicer non-compliance, "tranche warfare" between servicers and investors spawned by securitization, and conflicting priorities between first and second liens – predictably led to confusion and uncertainty among program managers, servicers and borrowers. In recent testimony before the Senate Judiciary Committee, Andrew Grossman of the Heritage Foundation summed up deficiencies in HAMP's program design:
[HAMP] has shown that, even with major subsidies, there may not be a large pool of mortgages that can be reasonably modified so as to keep at-risk homeowners in their homes….Most modifications that are obviously win-win have been done or could be done without any intervention….They're off the table….The modifications that fall outside of that band – that is, where even the HAMP subsidies are insufficient to enable the parties to make a deal – are likely to be unworkable. Payment that is acceptable to the lender is likely to be more than the borrower can afford to pay…So there is no good reason to believe that, absent coercion, loss mitigation….will cause deals to emerge that were previously impossible or unavailable.
In other words, as designed, HAMP could only ever be truly effective but for a small percentage of eligible borrowers. As of December 31, 2010, HAMP achieved 504,648 active permanent mortgage modifications compared to eight million foreclosure filings between 2008 and 2010, according to data maintained by RealtyTrac. In testimony before a House panel last June, the largest servicers countered that HAMP could at least claim success for establishing an industry-wide uniform baseline for loan modifications. But they went on to concede that "the focus needs to move beyond modifications to foreclosure prevention…[such] as short sales and deed-in-lieus."
While Treasury can continue to tweak HAMP, the department's statutory authority to restructure HAMP or to create a more effective replacement program lapsed on October 3, 2010. Therefore, Treasury and affected stakeholders are basically stuck with HAMP in its present form until existing contractual obligations are fulfilled. House Republicans recently introduced the "HAMP Repeal and Deficit Reduction Act of 2011" (H.R. 430), which would terminate HAMP and nullify existing contracts between the Treasury Department and loan servicers to enter into new obligations. As drafted, the legislation, sponsored by senior Republican members of the House Oversight and Government Reform Committee, would specifically target HAMP and would leave untouched other TARP-inspired loss mitigation programs managed pursuant to Treasury's Making Home Affordable initiative, such as the Home Affordable Refinance Program, Home Affordable Foreclosure Alternatives Program and the Second Lien Modification Program. Nor would the legislation affect workouts between individual homeowners and loan servicers in effect at the time of the legislation's enactment. With House Republicans determined to enact deficit reduction legislation, the "HAMP Repeal and Deficit Reduction Act of 2011" is a solid candidate for passage by the full House, where the Republicans are in firm control of legislative outcomes.
How far the Obama Administration and Senate Democrats will go to fight for HAMP's preservation is unclear at this time. Hearings over the last year suggest increased disillusionment by Senate Democrats with HAMP, thus renewing calls for mortgage cram down and foreclosure moratoria or legislative endorsement of foreclosure mediation programs. On January 27, Senator Whitehouse (D-RI) introduced the "Limiting Investor and Homeowner Loss in Foreclosure Act" (S. 222), legislation that would codify in the Bankruptcy Code the authority of U.S. bankruptcy courts to create foreclosure mediation programs. The legislation is inspired by what Senator Whitehouse and others see as a highly successful Foreclosure Loss Mitigation Program launched by the Bankruptcy Court for the District of Rhode Island. Although a creditor's attempt to challenge the court's authority to administer the program was recently turned back by the Rhode Island bankruptcy court, Senator Whitehouse seeks to formally establish such authority in law. Some in the servicing industry fear the legislation may be a backhand attempt to establish mortgage cram down authority because the loss mitigation program authorized by the legislation may enlarge the substantive rights of debtors by creating or granting a previously unauthorized retention option under Bankruptcy Code. At this time, the Senate Judiciary Committee has not announced action on the legislation.
Congressional debate over the appropriate federal loss mitigation policy will undoubtedly get caught up in the political cross-fire between the two political parties as the Dodd-Frank Wall Street Reform and Consumer Protection Act is implemented by the Obama Administration and Republicans consider legislation to restructure or replace the role of Fannie Mae and Freddie Mac in the housing market. However, as foreclosure filings continue to climb this year as predicted, the Republican House, Democratic Senate and Obama Administration may have no choice but to rethink the scope and nature of federal foreclosure prevention policy.
The views expressed in this article of those of Mr. Kinney and not of Baker Donelson or its clients.