Last month, we reported that the federal government’s Home Affordable Modification Program (HAMP) seemed to be picking up speed, although it still fell far short of its goal of 300 million loan modifications at that time. first tuesday’s accompanying take noted that HAMP, which aims to induce lenders to modify the loans of troubled homeowners, was an ill-considered program doomed to failure unless congress considered the underlying causes of default, such as job loss, poor regulation of lenders, and the lack of judicial authority to mandate cramdowns of excess homeowner mortgage debt.

In a recent report, the bipartisan Congressional Oversight Panel came to the same conclusion, advising Congress that HAMP was not set up to effectively deal with the causes of most current foreclosures: default by homeowners with complex mortgages, and by those who were formerly capable of paying their mortgages until a household income shock made payment impossible.

The panel advised that the current form of loan modifications, which generally leaves the loan’s principal intact, is likely to lead to a second wave of foreclosures in the future. This news arrived just after the HAMP program succeeded in modifying over 500,000 loans, more than three weeks ahead of schedule to meet its goal of 300 million. The percentage of cramdowns in these modifications was in the low single digits. The modification game of “extend and pretend” thus produces ever greater negative equity.

first tuesday take: It appears that the government is waking up to the facts that lenders, and first tuesday readers, have always been aware of. To effectively slow foreclosures, further government efforts of a profoundly different variety will be needed. To reduce mortgage debt on negative equity homeowners, bankruptcy judges will need authority to reduce mortgage debt to the value of the home (or less). This is the cramdown imperative: lenders must lose, if California’s homeowners are to keep their homes—and become solvent and active participants (with net worth) in the California recovery.

For more myths about foreclosure, and feasible solutions to California’s crisis, see last month’s report: “Negative Equity and Foreclosure.”

Re: “Foreclosure plan ill-suited for changing crisis, report says”, from the Wall Street Journal