Published at CNBC.com on October 28, 2010
By Tony Fratto
Are the Obama Administration’s home foreclosure mitigation programs really a failure?
The Treasury Department’s Inspector General for TARP, Neil Barofsky, handed down that opinion in his review of the Obama administration’s programs Monday, noting that fewer than 470,000 households received permanent modifications under Treasury’s Home Affordable Modification Program, or HAMP, and that the program is not on track to meet goals of modifying 3-4 million mortgages by 2012.
If your standard is that the HAMP program should have put a floor under home prices, and reverse the rate of foreclosures, then the program is a failure. But I’d argue that your standards were probably too high. Home prices and the rate of foreclosure are far more dependent on macroeconomic variables — like economic growth and the unemployment rate. It’s hard to imagine a politically palatable federal program that would reverse the impact on homeownership of tepid economic growth and elevated unemployment.
As for keeping more Americans in their homes, the Administration is largely suffering from unforced errors of setting unrealistic expectations — setting goals with neither reliable knowledge of the volume of delinquent loans, nor the personal financial health of the overwhelming number of Americans behind on their mortgage payments. The reason for the relatively underwhelming number of foreclosures is that no reasonable degree of modification of these mortgages could keep many Americans in their homes. They simply should never have been in the homes to begin with, and they still lack sufficient income to sustain even reduced mortgage payments.
But setting aside the Obama Administration’s lofty expectations, is the program actually working? That is, is the program assisting American homeowners “deserving” of modifications? The answer appears to be an unqualified, Yes.
The best evidence is the data most often cited to criticize the HAMP program — the fact the upwards of 40-50% of homeowners who receive trial or permanent modifications revert back to default and eventual foreclosure.
This data should more appropriately been cited as evidence that Treasury, working with banks, is actually reaching — and spending enormous time and resources on — not only those homeowners likely to be helped by modifications, but even those marginal cases where with only a marginal chance of sustaining mortgage payments. While HAMP can be criticized as an often confusing and costly effort that merely delays the inevitable for many homeowners, it can’t be criticized for not reaching enough homeowners likely to sustain their mortgage payments. The program is actually reaching hundreds of thousands of homeowners who will never be able to make their mortgage payments.
The reason for high defaults is not that Treasury set standards too high. In fact, Treasury — with every incentive to get more, not fewer, at-risk homeowners into the program — has stretched eligibility standards to their political limits, and probably beyond.
The Obama Administration needs to inject a dose of reality to broader expectations for stabilizing the housing sector — until the broader economy recovers and we work off our overhang in housing supply, home prices will remain weak and defaults will continue. The cures are economic growth and time.
In the meantime, Treasury would do well to reset expectations for its home foreclosure mitigation programs.
Tony Fratto is a Managing Partner at Hamilton Place Strategies, former Assistant Secretary at the U.S. Treasury Department, and a former White House official. He is also an on-air contributor for CNBC.