Lessons not learned
By Rachel Beck, AP Business Writer , On Friday December 25, 2009, 11:30 am EST
NEW YORK (AP) -- The government shouldn't reward liars. But that's the effect of changes to the Obama administration's failing program to help homeowners modify their mortgages.
Until recently the rules were clear: if you grossly understated your income to qualify for the program, you had to restart the loan modification process. It made sense. After all, we got into this housing mess partly because too many people were dishonest about how much they made.
Fast forward to today. The federally funded Home Affordable Modification Program was aimed at getting banks to rework mortgages for homeowners in order to slow the pace of foreclosures. The government set a goal of modifying up to 4 million mortgages over the next three years.
The program isn't working like it's supposed to. Since March, just 31,000 homeowners have won permanent relief. One big reason why is that lenders are doing what they should have been doing all along -- requiring things like proof of income.
How's the government responding? By letting homeowners who fudge their income numbers off the hook with little more than a wink and a nod.
"This isn't the kind of person the government should want to help," said Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning Washington think tank.
Under the $75 billion program, lenders are paid by the government to alter mortgages in hopes that cheaper loans will lead to fewer defaults. In most cases, modifications lower interest rates on home loans. Lenders also offer grace periods, longer repayment schedules or lower loan balances.
Borrowers say lenders are permitting trial modifications, but few are being made permanent. Lenders say borrowers aren't providing all the necessary paperwork to get loans permanently altered. Many lenders don't require documentation of income upfront. First, they'll make a verbal agreement with a borrower for a modification, and then verify the income once the trial period starts.
The government needs this program to work -- and fast. That's the only way to explain the Treasury Department's waiver of a requirement punishing borrowers who understate their income by 25 percent or more when trying to get a modification.
That means a borrower who had told a lender he made $75,000 but was found to make $100,000 doesn't have to restart the modification process. Under the waiver announced Dec. 16, that person now gets to continue the trial period instead of being rejected immediately.
"During the housing boom, borrowers had every incentive to overstate their income to get a bigger mortgage," said Larry Doyle, who spent more than 20 years working in the mortgage business on Wall Street and now writes the financial blog Sense on Cents. "Now, they have every incentive to understate their income to get a bigger modification."
Treasury Department spokeswoman Meg Reilly says that discrepancies could be the result of mistakes or changes in someone's job or income during the trial phase. She also noted none of the eligibility, documentation and verification requirements for a permanent modification change under the new waiver.
Still, a difference in income of 25 percent or more is not a rounding error. The government should err on the side of caution with these people, not give them a free pass.
Doyle thinks that allowing dishonest borrowers to stay in the program sets a bad precedent. It also shows that lessons from the housing bust haven't been learned.
The housing market's collapse wasn't just caused by lenders issuing risky loans to borrowers who couldn't afford them. More than a third, or 4.3 million, of the home loans issued from 2004 through 2007 were for borrowers who provided no or little documentation of their income, according to real-estate data company First American CoreLogic.
When housing prices were rising, homeowners who couldn't afford their mortgages for whatever reason -- lost jobs, wage cuts or a pileup of medical bills -- could often sell their homes for a profit to get out of trouble.
It's a much different story today. About one in four homeowners are considered underwater, meaning their mortgage exceeds their home value.
That has led to a dramatic rise in foreclosures. About 2.2 million homes since July 2006 have completed foreclosure, according to foreclosure listing service RealtyTrac Inc.
The government knows that reducing foreclosures could go a long way toward stabilizing property values, which would help reverse the housing slump and ultimately aid the broader economic recovery.
Dishonesty fed the housing bust. Let's not let it ruin the chances for its repair.