The Home Affordable Modification Program (HAMP) recorded 20,000 new mortgage loan modifications and 26,147 permanent modifications in February 2011. Thus national statistics are a new low for HAMP, a federal program established to aid homeowners avoid foreclosure with modifications which lower their mortgage loan payments or rates. 557,076 total active modifications have been entered into since HAMP launched in April 2009 and new modifications are now at less than 30,000 a month. The modifications are low compared to the 225,000 new foreclosures reported nationally in February 2011 alone.

Two additional federal programs have also produced dull numbers. The Second Lien Modification Program which reduces second liens for homeowners modifying through HAMP has recorded only 16,951 second lien modifications since August 2009. The Home Affordable Foreclosure Alternatives Program, which assists homeowners with a short sale or deed-in-lieu of foreclosure in order to avoid foreclosure, has completed only 4,488 transactions out of 10,177 started since November 2009.

The weak results demonstrate the unwillingness of banks and lenders to collaborate since they have no incentive to get involved. However, the government is caught creating a moral hazard if they offer more benefits to banks and lenders, costs that will ultimately come at taxpayerexpense.

first tuesday take: This is a case of the pondering physician: shall we treat the symptoms (negative equity) or shall we cure the disease (bad loans)? While programs like HAMP modifications only target the effects – symptoms – of the housing crisis, what the massive population of underwater homeowners really need is a cure to the chronic negative equity malady which has struck them. Cramdown bankruptcy authority from Congress is the curative (and preventative) medicine in this case, medicine lenders refuse to take. [For more information on the politics of the lending industry, see the April 2011 first tuesday article, Retribution deferred: lenders prove too powerful to be prosecuted.]

Reinstatement of lending fundamentals abandoned during the last 30 years is sorely needed. Homebuyers must be required to make down payments of 20% or more. Putting down more money up front – rather than flashing a lofty credit score – better ensures a homebuyer will be less likely to default. Lenders need regulations to avoid harming the societal institution of homeownership.

Lenders need to share in the risk of loss in any loan they originate, a risk which in the past has been left to MBB investors. Lenders originating mortgages must have a stake in the game and something to lose if the mortgage goes bad. Otherwise, it is likely the mortgages they dole out will deliberately include homeowners who will default. [For more information on borrower and lender risk in the mortgage market, see the March 2011 first tuesday article, Whose skin is in the game?]

A further step in the right direction is new legislation called the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Dodd-Frankrequires lenders retain 5% of the credit risk of mortgages they assign to others. Such reform will make the property market stronger – a dose of the medicine the lending market needs – however we are still a ways off from long-term recovery. [For more information on mortgage loan reform, see the May 2010 first tuesday article, The era of reform: new regulatiosn for bankers creating mortgage-backed securities.]

Re: “Government Foreclosure Prevention Reports More Lackluster Results” from The Atlantic