Expert Commentary

Policy intervention in debt renegotiation: The home affordable modification program

2012 study from the Federal Reserve Bank, Ohio State, Columbia, the University of Chicago and the U.S. Treasury on the shortcomings of the 2009 program.

Following the onset of the U.S. mortgage crisis, the federal government initiated the 2009 Home Affordable Modification Program (HAMP), which was intended to encourage loan servicers to renegotiate mortgages with homeowners who were defaulting or at risk for default. By offering banks $1,000 for each renegotiation — along with additional annual $1,000 payments for continued success — the program hoped to help 3 to 4 million homeowners. There was no rule that compelled banks to participate, however, even though policy alternatives to do just that were considered by Congress.

A 2012 study from the Federal Reserve Bank of Chicago, Ohio State University, Columbia University, the University of Chicago and the U.S. Treasury, “Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program” (PDF), analyzes data from the U.S. Comptroller of the Currency on the “performance and renegotiation outcomes for more than 60% of outstanding residential mortgages.”

The study’s findings include:

  • At its current pace, the modification program will help 1.2 million homeowners by December 2012, meaning only roughly one-third of the 3 to 4 million target will be met.
  • The program’s limited impact is the result of some banks being much better equipped for and experienced with renegotiating loans: “A few large servicers, with preprogram organizational design that was less conducive to conducting renegotiations, responded at half the rate of others.”
  • The banks with low participation rates were not named, but the nation’s largest servicers are commonly identified as Bank of America, JPMorgan Chase, Wells Fargo and Citibank.
  • The number of foreclosures that might have been prevented — assuming the program could have better spurred the few large banks that participated at low rates — is estimated to be 800,000.
  • The program’s success was likely hurt by strict rules about which kinds of homeowners qualified: “Verification of extensive eligibility criteria may have been challenging for servicers with less renegotiation experience, contributing to their low response to the program.”
  • The study does not detail specific organizational problems that plagued the banks in question, but the researchers suggest that participating in HAMP may have involved “changing their business focus from processing and channeling payments to actively renegotiating loans.” Moreover, the banks may not have had “appropriate infrastructure and hiring and training servicing staff.”
  • The data suggest that HAMP did induce some negotiations that would not otherwise have happened, and that the terms were often better for homeowners than they would have been offered on the private market. In addition, the “redefault rate of HAMP modified loans is significantly lower, around 5%, than that of private permanent modified loans in the treatment group.”
  • The authors note that homeowners did not appear to deliberately go into default to negotiate better rates: “Evidence suggests that HAMP did not lead to widespread strategic defaults, likely because of the extensive screening related to its eligibility criteria and its design of incentives for servicers. However, these factors may also have stalled the pace of the program. For example, verification of extensive eligibility criteria may have been challenging for servicers with less renegotiation experience, contributing to their low response to the program.”

The researchers conclude that “the program failed to account for firm level factors that resulted in muted program response of some servicers. The presence of these factors — and the lack of understanding of their specific nature — poses a significant challenge to the ability of the government to quickly influence such intermediaries through provision of financial incentives, thus hampering policies that require voluntary participation of such firms.”

Tags: financial crisis, consumer affairs