Small wonder that HAMP has turned into an embarrassing failure for the Obama administration.

This past weekend, I was in our Nation’s capital. It is always interesting to see things from the inside looking out, as opposed to from the outside looking in. It is like being in a house of mirrors.

One thing is apparent: the Beltway economy is not suffering like places such as Florida, Nevada, and Detroit. As a result, our elected representatives and the administration may not truly understand the depth of the housing crisis. I think they still blame the greed of “over ambitious” homeowners and speculators as opposed to the real driving force: Wall Street, the over-sized “too big to fail” banks and themselves. The buzz, of course, was the fact that Fannie Mae may have been playing its own political three card “monty” with homeowners over the past year. Simply put: whistleblower Caroline Herron, a former Fannie Mae executive and consultant, is suggesting the administration pushed for temporary modifications knowing full well that many of the loan modifications would fail prior to becoming permanent. In fact, Congress is now pushing for hearings.

Fannie Mae executives bungled their responsibilities of the federal government’s massive foreclosure-prevention campaign, creating a bureaucratic muddle characterized by “mismanagement and gross waste of public funds,” according to the suit Herron filed. The suit alleges that the homeowner-relief effort was marred by delays, missteps and executives’ preoccupation with their institution’s short-term financial interests. “It appeared that Fannie Mae officers were focused on maximizing incentive payments available to Fannie Mae under various federal programs – even if this meant wasting taxpayer money and delaying the implementation of high-priority Treasury programs,” Herron claims in the lawsuit.

The problem started with a skewed financial incentive at the heart of HAMP. The government paid Fannie bonuses for trial modifications that lasted three months, but apparently provided no incentive to move those homeowners into permanent modifications. Under pressure to show that they could turn a profit after the massive bailouts of 2008 and continuing bailouts in 2009, Fannie Mae executives apparently focused on earning those bonus payments.

The result: very few permanent modifications.

Herron charges that Fannie Mae continued in headlong pursuit of “trial mods” knowing many had little chance of becoming permanent. As late as September 2009, barely one percent of trial modifications had converted to permanent modifications by the end of their three-month trial, a Congressional oversight panel found. Nevertheless, Fannie Mae preferred doing trials, Herron alleges, because it was eligible to receive incentive payments from the Treasury Department for trial modifications booked before the end of 2009.

As of February 2010, 83 percent of the one million active modifications being handled by HAMP were trials rather than permanent arrangements. The allegations suggest that the modifications resemble the sub-prime loan market prior to 2008. Government incentives pushed Fannie not only to prioritize trial mods over permanent settlements, but also to pull borrowers with no hope of rescue into the program in order to profit off of them.

Herron’s lawsuit accuses Fannie executives of “actively working against” the borrower. In fact, she alleges that Fannie was reluctant to move quickly in processing the modifications.
Small wonder that HAMP has turned into an embarrassing failure for the Obama administration. Although the President promised 3 million modifications, only now approximately 300,000 have been successful.

Roy Oppenheim
From the Trenches

With about 6 million folks going to lose their homes to foreclosure this year, I have been repeatedly asked what kind of grade I give the Obama administration in addressing the foreclosure crisis during the first 100 days. I would say a B or B-. Let me explain.

On the one hand, there has been some improvement in the overall credit markets and we are seeing a lot more refinances at historically low interest rates. However, only about 2 in ten families will qualify to refinance this year. That means a whopping 80% will have to proceed on a different course.

The so called “mortgage modifications” so far have been a failure. 50% of all modifications end up in foreclosure. That is the current number. Because the servicers have little control over their obligations to their investors, it is cheaper and safer for them to foreclose.

Short sales have gone way up and it seems that the servicers are more likely to agree to a short sale than a modification where the investor takes a crew cut!

I have always described the “Obama plan” as a three legged stool:

1. Refis;
2. Modifications; and
3. the threat of bankruptcy judge telling the lender that the principal amount of the loan is being reduced or “crammed down” their throats due to the decrease in the property values.

Of course, to date the third leg of the stool does not exist since it got hung up in the Senate. That will not likely change due to the lobbying done by the banking industry. Ironically, it appears that some of the very tax payer bailout money is now being used to pay expensive Washington lobbyists to keep this bill from coming to the Senate Floor. How ironic! Thus it appears that the long sort after weapon that foreclosure defense attorneys were awaiting is remaining elusive and will continue to hinder our ability to get better results in our loan modification negotiations.

So, would I have given the President an A if the bankruptcy laws had actually been changed in these first 100 days???  You bet ya!!!

Today, as many of my friends celebrate Good Friday and I continue to celebrate Passover, my office is a virtual ghost town. So I actually had a moment to take stock on changes that are occurring in our collective lives. First and foremost it is just hard to believe that the White House held a Passover Seder last night. http://thecaucus.blogs.nytimes.com/2009/04/09/obama-to-host-seder-dinner/ The Seder is the ceremonial meal whereby Jews retell  their miraculous story of their departure from Egypt while having a rather long ceremonial meal conducted in a certain order.  In some ways the Passover story can serve as an allegory for the Obama Administration in that just over a year ago it would have seemed that only by a “miracle” would we be sitting here right now with our first African American President.

President Obama Hosts First Ever Passover Seder at the White House

Further, as someone deeply entrenched in the real estate economy, as a foreclosure defense lawyer and owner of Weston Title, I would never have envisioned a sitting President calling on homeowners to refinance their homes.   And yesterday that is exactly what the President did! http://online.wsj.com/article/SB123932215927307049.html The President explained the low interest rate climate created by the Bailout and how families can actually create their own stimulus of the economy by pumping back the money they save through refinancing– directly into the economy.

But even before the President gave his three cheers to mortgage refinancing, we have been seeing an up tick in activity in the real estate market in general and in terms of banks contacting us to help them close their refinances. In fact, earlier in the week, I thought for a moment it was Christmas when all the phone lights on my office phone were lit up like a Christmas Tree. I had to use my cell phone to call out of the office.

The buyers who are closing are bottom fishers looking for great deals from short sales, foreclosures, builder specs and generally first time home buyers who have now concluded that buying is cheaper than renting.  Some high end buyers are anticipating a wave of inflation that may be here sooner than any one can imagine.

So with all the change that is going on… one thing that has not changed– and will not change is how capitalistic market forces that are merely reflections of our collective greed and fear are  working well once again.

Have a great weekend!

It appears that the financial markets are taking their cues from the President as opposed to the Treasury Secretary. This week we saw the major equity markets tumble as the Treasury’s half-baked Bailout II Plan was partially unveiled.  But most importantly, the markets started to respond– first yesterday- after the President began to dust off the history books and talked about some kind of mortgage forbearance program and an allocation of $50-$100 billion from the Bailout. Today, interestingly enough, Citi Bank and JP Morgan Chase agreed to follow suit and hold off on filing new foreclosures for three weeks until the President announces his new program.

So what can we expect in such a program? If we let history be our guide, during the Depression the government guaranteed a number of home loans that were under water through the Home Owners’ Loan Corporation (HOLC). Its purpose was to refinance homes to prevent foreclosure. The HOLC granted long-term mortgages to over a million people facing the loss of their homes. HOLC was only applicable to owner occupied homes and additionally assisted mortgage lenders by refinancing problematic loans and increasing the institutions liquidity. When the HOLC ended its operations and liquidated assets in 1951, HOLC turned a small profit. Over a period of 12 years or so, the government recouped about 80% of the money they guaranteed.

So how will the Obama administration implement such a program?  Here are my thoughts–in brief.

Today I would run the program as follows:

1. Owner occupied homes only.
2. You must be at least 60 days late on your payment.
3. All homes will need to be appraised in the program.
4. Banks will need to absorb the first 20% loss of equity. If the banks foreclose, they will lose that money regardless.
5. The Government will then effectively guaranty a second mortgage that would only be paid back if at the time of a bonafide sale of the home the property had increased in value above the first mortgage. Otherwise, the bank would be reimbursed for the loss of the second mortgage.

If the government follows this game plan it will likely not lose much of its equity, provided the loans are modified with low interest rates and people have income from jobs to support the loans.

Maybe this is what the markets and banks are waiting to hear from the Obama Administration. After all, I thought the purpose of the bailout was to help the economy. Well… there is no better way to help the economy than to stem the flow of foreclosures. We all know that… the President speaks of it, the Banks now recognize it… and so does the market!