About two weeks ago, one of my co-workers brought up the Home Affordable Modification Program (HAMP), complaining about how it was passed by the Obama administration merely as a populist, partisan trick.
According to this co-worker, HAMP has no practical purpose other than to make the President appear supportive of the many unlucky homeowners who are underwater – those who owe more on their mortgage than their home is worth – and in danger of losing their homes. As if being supportive of these people is a bad thing.
When he said this, it was everything I could do not to bang my head on the table. For those of you who don’t know, I work in the sub-prime mortgage due-diligence industry, helping the saps who invested in sub-prime mortgage securities lose less money than they might otherwise.
Frankly, he should know better. He sees every day how HAMP allows people to stay in their homes, when they would otherwise end up evicted or bankrupt.
HAMP was passed shortly after the collapse of the housing market, when declining property values caused homeowners to be underwater, or owe more on their mortgages than their property is worth.
If anything were to happen to an underwater borrower’s income, they wouldn’t have the pre-mortgage-crisis option of selling their property to pay off their mortgage, thereby avoiding eviction and foreclosure.
HAMP sets aside federal funding to compensate banks that are willing to reduce the amount that homeowners owe on their mortgages, generally also reducing their interest rate and monthly payment. This allowed many homeowners to keep their homes when they would otherwise have had to declare bankruptcy or let the bank foreclose.
It also benefits the investors who purchased sub-prime mortgage securities. Any borrower that is able to take advantage of HAMP is still making mortgage payments. Foreclosure, on the other hand, is expensive and banks will recover significantly less than is owed on the mortgage.
Of course, HAMP isn’t perfect. Banks were reluctant to implement it at first, it’s much more complicated than it needs to be, and it should have been better funded.
If it’s not already obvious, there are two major reasons why HAMP is such a big deal.
The first is that it keeps people in their homes. The rash of foreclosures that occurred after the housing bubble popped, and the resulting oversupply of cheap bank-owned properties, is one of the (many) reasons that property values have dropped as far as they have. Without HAMP, there would have been more foreclosures, resulting in even lower property values and more people without homes.
The second reason is that the economy is currently in what some economists call a “debt deflation spiral”. That is, individuals, families, and businesses are so focused on deleveraging (paying down debt) that they are unwilling to devote the same portion of their income to consumption as they did before the crisis.
The resulting weak demand, in the aggregate, is a primary factor in the extended slump that we have been experiencing since the crisis began. Consumers aren’t spending enough to return production to pre-crisis levels, so companies are unable to hire more employees.
In short, HAMP is good for borrowers, good for the economy, good for the investors that bought these securities, and it doesn’t hurt banks. HAMP and programs like it help the economy on the road to recovery.
One presidential candidate wants to expand this program and create more like it. The other lobbied against it and insisted that banks be allowed to foreclose on whomever they wished. You decide which one will be better for this country.