The fallout from the economic crisis of the last decade reshaped the country’s economy, and led the government to take several significant steps to both address the issues that caused the crisis and the issues that stemmed from it.
Those steps included the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, and the founding of the Consumer Financial Protection Bureau in 2011, both of which celebrated anniversaries on July 21.
While there are some on Capitol Hill and on Wall Street who would like to see the CFPB eliminated and Dodd-Frank repealed, there are several government programs that have a definite end date later this year.
HAMP and HARP, part of the government’s Making Home Affordable program, saw the government work together with the mortgage industry in an effort to keep struggling homeowners in their homes in the wake of the housing bubble bursting.
Now, with the deadline for HAMP and HARP quickly approaching, the Department of the Treasury, Department of Housing and Urban Development, and the Federal Housing Finance Agency, the three main governmental agencies that were involved in each program, are taking a look back the programs’ history, progress, and providing a look at what’s next.
In a comprehensive report published Monday, the Treasury, HUD, and the FHFA say that while these programs are set to end this year, the government plans to continue working with the mortgage industry on various loss-mitigation programs moving forward, but caution that the industry needs to be prepared to do more moving forward.
According to the agencies, the financial crisis showed that mortgage servicing industry was “ill-equipped” to handle the fallout from the crisis and work with struggling homeowners to keep them out of foreclosure, through no fault of its own.
“Before 2009, the mortgage industry was not prepared to deal with a financial crisis or modify mortgages on a widespread scale,” the agencies write in the report.
“Mortgage servicers had insufficient resources to address the needs of a market that was struggling from increasing foreclosures,” the agencies continue. “Mortgage servicers’ expertise and infrastructure was largely focused on overseeing collection processes and foreclosing on those who failed to pay.”
In many cases, mortgage servicers were not allowed to approve loan modifications without investor approval, the agencies note.
“While that model may have been sufficient for the industry during times of economic growth and house-price appreciation, it proved to be inadequate in 2007, when the industry experienced rapidly rising defaults and declining home prices, which — in large part — were driven by widespread foreclosures,” the agencies state.
“Indeed, there was no standard approach among mortgage servicers and investors about how to respond to homeowners who wanted to continue making payments, but were in need of mortgage assistance,” the report continues. “Most solutions offered by servicers simply added unpaid interest and fees to the mortgage balance, which often resulted in higher — and thereby less sustainable — payments for homeowners, regardless of a hardship.”
Enter the HAMP program, the first and largest program under MHA, which provided a standard for mortgage modifications for all mortgage servicer and investor types, with the goal of reducing struggling homeowners’ monthly mortgage payments to an “affordable and sustainable” amount.
And in the seven years since HAMP began, there have been a total of 10.5 million modification and mortgage assistance arrangements completed through government programs and private sector efforts from between April 2009 and the end of May 2016.
The program worked and continues to work, the agencies say, but caution that there’s more work to be done.
“As a result of the agencies’ programs, regulatory actions, and private sector initiatives, steps taken by the mortgage servicing industry to improve practices over the past seven years have been encouraging,” the agencies state.
“The industry is generally better prepared now to provide assistance to struggling homeowners than it was before the crisis,” the agencies continue. “This is due, in part, to the adoption of certain homeowner engagement standards including continuity of contact, solicitation timeframes, and certain notice and appeal processes required by the Consumer Financial Protection Bureau.”
Despite those positive steps, servicers will no longer be required to evaluate homeowners for a standard mortgage modification like HAMP, except to those struggling homeowners with loans insured or guaranteed by the Federal Housing Administration, Department of Agriculture or the Department of Veterans Affairs, after December 31.
But the agencies say that the mortgage industry can take steps to ensure that loss mitigation is still a priority over foreclosure, and say the government is willing to help.
“Foreclosures can have severe consequences for families and communities. In addition to damaging a homeowner’s access to credit, foreclosures can hinder children’s educational success, increase crime in communities, and drain resources from local governments,” the agencies state.
“Studies have shown that when families with children enter foreclosure, children are more likely to suffer in school and develop behavioral and health issues,” the agencies continue.
“Widespread foreclosures not only depress housing prices in a community, but can create a contagion effect that can ripple through the local economy,” the agencies state. “Neighborhoods may experience more crime when properties become vacant and local governments reduce police forces due to declining tax revenues.”
According to the agencies, the “personal and societal” impacts of mass foreclosures show the importance of government-sponsored foreclosure prevention programs to help struggling homeowners.
To avoid another massive wave of foreclosures, the agencies state that the mortgage industry can take several steps, including the adoption of five “guiding principles” that the agencies believe should be the foundation for future loss mitigation programs: accessibility, affordability, sustainability, transparency, and accountability.
Those five principles are important, the agencies state, because it’s not only the HAMP program that will be ending soon.
According to the agencies, other pieces of the infrastructure supported by MHA and HAMP, such as requirements to offer post-modification counseling, third-party escalation centers, and public reporting of modification and servicer performance will also be phased out, or provided on a limited basis depending on investor or servicer.
“It is in this context that the agencies look to continue their collaborative efforts and encourage stakeholders to design a framework for the future of loss mitigation,” the agencies state. “Further, the agencies recommend that the framework incorporate — albeit modified as necessary for a non-crisis housing market — the best practices developed under MHA and other programs, which have led to positive and sustainable outcomes for homeowners, investors, and servicers.”
To that end, the agencies used their common experiences with loss-mitigation programs over the past seven years to identify the five principles that should guide future loss mitigation programs.
Here, from the agencies’ report, are the five principles and why each is important:
Accessibility: Ensuring that there is a simple process in place for homeowners to seek mortgage assistance and that as many homeowners as possible are able to easily obtain the needed and appropriate level of assistance.
Affordability: Providing homeowners with meaningful payment relief that addresses the needs of the homeowner, the servicer and the investor, to support long-term performance.
Sustainability: Offering solutions designed to resolve the delinquency and be effective long-term for the homeowner, the servicer and the investor.
Transparency: Ensuring that the process to obtain assistance, and the terms of that assistance, are as clear and understandable as possible to homeowners, and that information about options and their utilization is available to the appropriate parties.
Accountability: Ensuring that there is an appropriate level of oversight of the process to obtain mortgage assistance for the protection of all parties.
“Balancing these five guiding principles can help maximize participation in foreclosure-avoidance efforts and reduce losses on mortgage assets, thereby creating mutually beneficial outcomes for mortgage servicers, homeowners, and investors,” the agencies state.
According to the agencies, there has been a positive trend of collaboration among government agencies, servicers, investors, and consumer advocates since 2009, with all parties “working diligently to stabilize the housing market and help struggling homeowners keep their homes” following the financial crisis.
But now, the industry must do more, the agencies state.
“With the retirement of MHA, the industry will shoulder more responsibility for assisting struggling homeowners through proprietary modifications and other loss-mitigation programs,” the agencies state.
“One of the most important things we have learned from the crisis-era efforts is that a collaborative process results in better outcomes for all stakeholders. That lesson should not be forgotten, as the industry takes a more prominent role in defining the future of loss mitigation offerings,” the agencies continue.
“The progress in developing successful loss mitigations programs over the past seven years has been encouraging and has benefitted homeowners, servicers, and investors,” the agencies add.
“We look forward to further evolution of home retention solutions and foreclosure alternative programs that will benefit all stakeholders,” the agencies conclude. “To this end, the agencies will continue engaging with the stakeholders—particularly mortgage servicers—as home retention and foreclosure alternative options are developed, with the goal of assessing how these new options will incorporate and further develop these core principles.”