Loan Modification Blues (take 2)

It would be hard to find an opponent to loan modifications who is both as staunch and vocal in their opposition as I am. I’ve written at nauseating length about the failures of the loan modification program, Home Affordable Modification Program (HAMP), and have remained consistent in my criticism of the plan since it was promised during Obama’s campaign, and implemented in February of 2009. This plan was supposed to be the great savior of the housing market, much in the same way that Obama was presented as the savior of the economy as a whole. Fast forward one full year, and the president has sent the stock market running scared once again by promising to “get tough” with banks. (At least George Bush was talking to terrorists when he infamously said “bring it on”) So Obama’s rolling up his tailored sleeves in hopes of beating up the big bad banks, and the HAMP that was heralded as the solution to our foreclosure crisis boasts a 1% success rate and is an unmitigated, unrelenting, failure. A failure that many talk show hosts (John Williams Thursday show) still fail to fully comprehend.

Many pundits and commentators attribute the failure of the loan modification program to the intricacies of the program itself. Stringent guidelines interlaced with a heaping truckload of bureaucracy that confound the homeowners it was supposed to help, and a lengthy process that is anything but efficient. Think DMV but with longer lines, and much more money involved. I’ve also contended from the very beginning that banks have no interest in modifying the loans, since they’re pretty certain that the customer receiving the modification is going to end up in default somewhere down the road anyway. I wrote an article on that, and was lambasted as being a bank lover and apologist, as if those area character flaws akin to stepping on frogs and stuffing lit firecrackers into still living fish. (I wouldn’t do either) I knew from the beginning that banks wouldn’t want to modify loans, but my reasons, while myriad, did not include the primary reason that Mr. Arkadi Kuhlmann, CEO of ING Direct, smartly identified in an article he wrote for the Wall Street Journal.

Mr. Kuhlmann’s article, “Why Mortgage Modification Isn’t Working” decries government accounting rules as the primary reason that loan modifications are not being pursued by banks. According to Mr. Kuhlmann:

If a bank modifies a mortgage, it must record the write-down as an expense on its books. For example, if a homeowners monthly payment is reduced by $400 per month for 24 months, the bank has to report that it “lost” $9600. The bank, though, didn’t lose any money- it’s still scheduled the receive the totality of the loan principal, just less interest”

So the banks are being verbally encouraged to modify loans via the HAMP, but in reality, the accounting procedures enforced by the same government run counterintuitive to the banks best interests. It’s yet another example of feel good theories being refuted by the nuts and bolts of the situation. It’s like Obama promising to get tough on banks and so-called “fat cat bankers’, threatening to tax their bonuses and penalize their gaudy success, and then in the next breath telling banks that they need to lend more money in order to help move the country toward recovery. The theory that you can chastise someone for success, then encourage them to be more successful must only make sense in smoke filled rooms, where pulled shades and jackets with leather elbow patches are preferred, though possibly required.

The irony of a government that verbally commands banks to lend and be profitable, then promises policy that will punish them for doing so, while at the same time laying the blame of the entire economic disaster of 2008/09 squarely at their pedicured feet, is not lost on me. The same misguided war between the words of the administration and the policies it endorses as they relate to banking procedure is what has garnered the HAMP a disastrous 1% success rate. The program is trumpeted as a solution, yet undermined by policies put in place simultaneously by the same administration.

I personally continue to believe that loan modifications don’t work because I doubt most people are being foreclosed on because their payments are $250 too high. I think foreclosures have risen because of a rare confluence of negative equity, job loss, and a cultural acceptance of the procedure. Joe Homeowner isn’t losing his house because he’s $200 behind every month in making ends meet, he’s losing his house because his house is worth $200k and his mortgage is $325k, and the ends aren’t meeting either. HAMP is a yet another fairytale being sold as a solution to an increasingly wary public.