You Broke It, You Fix It?
Tuesday 25 August 2009
by: John Dunbar | The Center for Public Integrity
A subprime lending subsidiary of American International Group (A.I.G.) will
be benefiting from another government bailout meant to address the subprime
crisis. (Photo: AP)
Subprime players get tax money to fix subprime mess.
The funds come from the federal government's Home Affordable Modification Program (HAMP), begun in February by the Obama administration to coax lenders into modifying mortgages that might otherwise result in foreclosure. According to a Center for Public Integrity analysis of public records, of the 25 top participants in the program, at least 21 were heavily involved in the subprime lending industry. Most specialized in servicing subprime loans, but several both serviced and originated the loans.
Among those on the list:
- At least two firms that earlier settled charges of illegal collection practices brought by federal regulators; another was placed under federal supervision before voluntarily surrendering its bank charter;
- A subprime subsidiary of top-bailout recipient American International Group Inc. (AIG);
- Two former subsidiaries of Merrill Lynch & Co. and one former subsidiary of Lehman Brothers, investment banks that helped underwrite the subprime boom, and;
- A subsidiary of the now-sold, former No. 1 subprime lender in the nation, Countrywide Financial Corp.
Mortgage lenders and servicers have been reluctant to participate in foreclosure prevention programs despite their role in creating the subprime debacle. Intense pressure from Congress and the White House hasn't worked either. The stick has not been effective, so the Obama administration is offering a carrot — billions of dollars in incentive payments to lenders and loan servicers to encourage them to participate.
The plan is different from the government's primary bank bailout scheme, in which taxpayers bought stock in troubled financial firms. In the foreclosure relief program, there will be no return on investment for taxpayers, at least not directly.
Backers argue that it is essential to contract with subprime specialists to modify subprime loans, but others have raised serious questions as to whether paying them to do it with public dollars sends the wrong message — that mortgage companies (and borrowers) whose actions contributed to the near-collapse of the financial system are deserving of public funding.
And, more importantly, some question whether loan modification programs — particularly those that involve subprime mortgages — are even effective.
"It's tough to say whether we will actually get anything in return," says Mark Calabria, director of financial regulation studies at the Cato Institute. "One category of borrowers will cure anyhow. One category, even with the modifications, will probably fail again. You're probably looking at not more than one third of the borrowers who will go through the modifications that will ultimately be sustainable."
A $50 Billion Bailout
The Home Affordable Modification Program will use up to $50 billion in federal bailout funds to help as many as four million homeowners stay current on their mortgages. Under the plan, participating mortgage companies agree to drop homeowners' payments to 38 percent of their monthly income. The Treasury Department then matches dollar for dollar a further reduction to 31 percent of monthly income.
Borrowers are enrolled in a three-month trial period. If they keep up their payments, they qualify for a permanent modification. Once the trial period ends, the servicers can start collecting incentive payments. To date, none have reached the three-month mark, so no incentives have been paid out.
Servicers receive an upfront $1,000 incentive payment for each eligible modification plus $1,000 each year for three years if the borrower stays in the program. The borrower may receive a $1,000 payment to be applied toward the principal for five years.
The program also seeks to reach borrowers before they get into trouble. Lenders qualify for a $1,500 one-time payment for modifying a loan that is still current while servicers can collect $500.
The Treasury Department did not respond on the record to specific questions from the Center, but spokeswoman Meg Reilly said in a written statement that more than 270,000 modifications are in effect and more than 430,000 loan modification offers have been extended to borrowers thus far.
"HAMP provides meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications," the statement reads in part.
Loan servicers — the companies that calculate what's owed, collect payments, and handle foreclosures — are key to the success of the program. They must agree to participate before a borrower may qualify. The servicer and the lender may be the same company, but not always.
As of August 12, 44 entities had qualified to collect a maximum of $21.5 billion in incentives, according to data from the Treasury Department. Not all the cash will go to servicers. The total includes the maximum total of payments to loan servicers as well as lenders and borrowers. So the actual total for those companies listed below will be less.
Subprime Memory Lane
The list of the top 10 recipients is like a walk down subprime memory lane. Here are the leading HAMP participants, with the amount of taxpayer-funded incentives they are slated to receive:
Of the 25 top participants in the foreclosure relief program, only four firms — RG Mortgage Corp., PNC Bank, Bayview Loan Servicing LLC, and Bank of America — did not qualify as servicers or originators specializing in subprime loans, according to Center research. However, PNC did buy National City Bank, a major subprime lender through its ownership of First Franklin Corp. (No. 4 on the Center's subprime 25 list), reportedly with help from government bailout funds last year.
Falling Dominoes
The collapse of the subprime lending market was the catalyst for the financial meltdown nearly a year ago. The risky mortgages were bought by investment banks, packaged into securities, and sold to investors worldwide. Once the loans started going into foreclosure, the dominoes started falling.
While the larger economy appears to be edging back from the brink, the numbers of foreclosures, as well as foreclosure rates, have kept climbing. According to RealtyTrac data, there were 1.9 million foreclosure filings in the first six months of this year — a nine percent increase from the previous six months and nearly 15 percent above the same period last year. That means in the last six months one in every 84 homes had at least one foreclosure filing.
In the first quarter of 2009, 7.2 percent of mortgages were seriously delinquent, according to a Mortgage Bankers Association survey, compared with 6.3 percent in the previous quarter and 1.9 percent in the first three months of 2005.
Subprime mortgages are failing at a far higher rate than mortgages in general.
More than 36 percent of adjustable-rate, subprime mortgages were considered seriously delinquent in the first quarter of 2009, compared with 33.8 percent the previous quarter and 5.2 percent in the first quarter of 2005.
Even more worrisome for the mortgage modification program is the abysmal rate of success for loan modifications to date. According to a survey by the Office of the Comptroller of the Currency and the Office of Thrift Supervision, after one year, only 29.5 percent of modified loans were still "current," or being paid off on time. Thirty-three percent were "severely delinquent" and 17 percent had gone to foreclosure.
The Treasury Department's Reilly said modifications are only one "one piece of the administration's broader effort to bring relief to struggling homeowners and stabilize the housing market." For example, another program is a $10 billion insurance plan to guard against further declines in home values.
But if the modification plan is not successful and mortgages simply go back into foreclosure, say critics, it could go down in history as a colossal waste of public money that prolonged rather than ended the nation's still-critical housing crisis. "We're going to be spending billions without a clear guideline of how many foreclosures we're actually avoiding," warns the CATO Institute's Calabria.
Other Coverage of Subprime Meltdown from CPI:
Who's Behind the Financial Meltdown?
The Roots of the Financial Crisis: Who Is to Blame?
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Kat Aaron contributed to this story.
Comments
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Hummm, billions of dollars
Wed, 08/26/2009 - 16:21 — Anonymous (not verified)Debt repudiation - it's good
Wed, 08/26/2009 - 16:41 — Anonymous (not verified)Numerous luminaries have
Wed, 08/26/2009 - 18:38 — Anonymous (not verified)Then we are told by Obama
Wed, 08/26/2009 - 20:07 — Lice-Christ (not verified)