Now We Know: Why Obama’s Loan Modification Program Failed Homeowners – Oppenheim Observes

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