26 Jan Finding Their Inner George Bailey
The Home Affordable Mortgage Program (HAMP) – the government-funded loan modification program that offers help for people who have fallen behind on their mortgage to stay in their home – was fatally flawed from its inception. The administration acted as though banks are run by George Bailey when, in reality, they are run by Mr. Potter.
If you don’t get the reference, George Bailey is the Jimmy Stewart character in “It’s a Wonderful Life,” the Frank Capra Christmas movie. George runs the savings and loan in Bedford Falls that he inherited from his father, a bank that lends to the people of the town. He’s committed to seeing them become homeowners who “work and pay and live and die in a couple of decent rooms and a bath.” Mr. Potter, on the other hand, runs the town’s commercial bank, is a slumlord, and is dedicated to squeezing the last bit of profit from the town’s residents.
And HAMP is the kind of program that would have made Mr. Potter sneer and chuckle as foreclosed properties fell like dominos into the banks’ hands despite borrowers’ (ultimately naive) belief that there was a federal program that could help them, and that because they met all of the qualifications they could keep their homes.
Millions of people lost their homes because of this fatal assumption that modern-day bankers would suddenly find their inner George Bailey. The HAMP program is, in theory, a straightforward assistance program funded by the federal government. Banks that took Troubled Asset Relief Program (TARP) bank bailout money were required to offer HAMP modifications to borrowers whose loans were backed by Fannie Mae and Freddy Mac, two government-funded agencies. To qualify for HAMP, a borrower has to own a single family home worth less than $729,750 with a mortgage that originated before January 1, 2009. The mortgage payment must exceed thirty-one percent of the owner’s gross income and must be unaffordable as a result of documented financial hardship. That’s it. And once approved the mortgage is reset to thirty-one percent of a borrower’s income, interest rates are reduced, and sometimes the principal amount of the loan is reduced.
If George Bailey had been given a tool like that, it would have been enough to save all of Bedford Falls. But the banks implemented the program in a way that was pure Mr. Potter. As a bankruptcy attorney I see people who not only were not helped by HAMP, but whose financial disaster is a direct result of failed HAMP modifications.
Banks set up a two track process in which they would proceed with loan modifications and foreclosures at the same time. They would only consider borrowers who were two to three months behind on their mortgages for modification even though the HAMP program guidelines do not require this. Paperwork would be lost over and over again (one client sent the same information to the same bank seven times – and still ultimately faced foreclosure). Usually, the divisions of the bank that handled modifications would have no communication with (or even knowledge of) the actions of the foreclosure divisions. HAMP modifications would be denied on the eve of foreclosure. Sometimes, homes would be foreclosed on while borrowers continued to believe that their loan modifications were awaiting approval.
There are really only two solutions to this problem. Let banks continue to administer this program, but offer sufficient oversight in an effort to keep Mr. Potter in line. The new Consumer Financial Protection Bureau, an agency that is consumer-focused rather than bank-focused and was bitterly opposed by the financial services industry, offers the best hope for doing this. Even though far too many have already lost their homes, aggressive oversight offers the best hope for the program to work.
But there is already a national infrastructure in place that could very quickly adapt to offer homeowners immediate, individualized solutions to mortgage problems; the United States Bankruptcy Courts. Under some circumstances, businesses that are in bankruptcy can have their mortgages re-written, benefitting both bank and borrower, letting the business restructure. On the other hand, current bankruptcy law expressly forbids judges from modifying the terms of a residential mortgage. This, frankly, does not make sense. If the HAMP guidelines or some other common sense approach to helping borrowers were incorporated in the bankruptcy code, and if federal courts could force banks to modify qualified mortgages, a failed program could be resuscitated.
Yes, people can change. But you cannot expect Mr. Potter to become George Bailey. Strict oversight of the government’s home loan modification programs offers the only real hope that they can serve those in the most desperate need of help.