The federal government is running out of ways to keep Americans from defaulting on their home mortgages. President Obama's touted Home Affordable Modification Program hasn't done the job. More than half the recipients, homeowners who qualified to have their monthly payments reduced, have defaulted after getting that help. The latest effort will pay banks and other lenders to reduce outstanding principal on many mortgages to a number that reflects how far home prices have fallen.
Underwater mortgages, those in which the borrower owes more than the house is worth, continue to dog the housing market. Perhaps a quarter of all home mortgages suffered from negative equity at the end of 2009 and another 5% looked headed that way, Barclays analyst Jason Goldberg wrote last week. In states like California, Florida, Nevada and Arizona, one-third to two-thirds of mortgages are underwater.
The HAMP program has made barely a dent. At the end of February only 170,000 loans had been permanently modified, the majority of them by reducing interest rates to bring monthly payments down. So far 52% of those mortgages have still gone into default. The latest plan is to offer lenders an incentive, 10 to 21 cents per dollar, to reduce the amount borrowers owe. For second loans, like home equity lines, the incentive is smaller, just six cents per dollar reduced. Unemployed homeowners can get an automatic reduction in their monthly payments until they find a job.
For banks the incentives may be meager but it's better than being ordered by the government to write down loan values. As Gerard Cassidy and other analysts at RBC note, the big banks with huge mortgage portfolios like
The HAMP plan will probably keep some borrowers from losing their homes but it won't duplicate strong economic growth, say the RBC analysts. Creating jobs should be the focus, not tweaking assistance programs with poor track records, they add. As more homeowners find work, more of them will get back to making their mortgage payments on time. Easier said than done.