What can we learn from current or previous efforts to link evidence-based outcomes to policy or program development (in the housing sector or elsewhere)?
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Since the financial crisis of 2008 and the ensuing collapse of the housing market, federal agencies and two administrations have sought to provide government-supported relief to American homeowners facing falling home prices and unsustainable mortgages. But what do we have to show for it? FHASecure was one of the first programs designed to protect homeowners at risk of foreclosure. When initially launched, only borrowers that were current on their mortgage could participate thus original estimates projected only 60,000 homeowners would be aided by the program (New York Times). Later, delinquent borrowers were eligible to participate and ultimately more than 500,000 borrowers were refinanced.
The Bush Administration proposed a principal forgiveness program ultimately known as the Hope for Homeowners program (H4H). While the level of uptake was expected to be modest the program guidelines were altered by Congress under HERA. A surprisingly small number of H4H loans were completed – in 2011, only 632 loans were completed (SIGTARP). In total about 2,000 borrowers were helped.
The Home Affordable Modification Program (HAMP) was originally authorized in 2008 as part of TARP and was intended to assist homeowners to modify mortgages with interest rate reductions, terms extensions and principal forbearance. HAMP is still active and has seen moderate success, notwithstanding, the program fell short of projections to transition three to four million homeowners into more sustainable modifications. A Congressional Oversight Panel called the program a failure (New York Times). To date, about 700,000 modifications have been completed and only about half of those have become permanent (FHFA).
The Home Affordable Refinance Program (HARP) has been one of the Obama Administration’s main vehicles for borrower relief. HARP was introduced in March 2009 and was projected to initiate three to four million refinances. The program was designed to help borrowers with a loan to value (LTV) ratio over 80 percent. This program suffered however, because borrowers that were more than 25 percent underwater were excluded (American Banker).
In October 2011, President Obama announced yet another program, HARP 2.0, as the first version failed to reach all the desired homeowners. The second version eliminated the 125 percent LTV limit. Fannie Mae and Freddie Mac adjusted their automated underwriting systems less than two months ago in March to accept the new HARP 2.0 loans. In addition, in President Obama’s State of the Union address in January and in his recent congressional ‘To-Do’ List included provisions to revamp the available refinance programs.
The FHA Short Re-Finance program launched in 2010 has also seen minimal participation. While HUD estimated that 500,000 to 1.5 million borrowers could be eligible for the program only 200-300 loans are closed each month. The program has also faced Congressional hurdles including in March 2011 when they voted to end the program.
So the jury is still out on the latest attempts to help American homeowners.
So what’s next? Will HARP 2.0 meet expectations, or can we expect yet another relief program?
As evidenced, previous attempts to help distressed homeowners have helped hundreds of thousands of borrowers but have fallen short of their lofty goals. Although each program delivered assistance to a nominal population of homeowners, the proportion helped is dwarfed by the high number of distressed properties and homeowners. Last year there were 2.7 million reported foreclosure filings, defaults, auctions, and bank repossessions (SIGTARP).
Many of the programs have been exclusive to loans originated by the government-sponsored enterprises (GSEs). Previous programs have also restricted access for seriously distressed homeowners, with the highest LTVs. However, these homeowners should be the target audience for relief as they are at the highest risk of default. Principal reductions for distressed homeowners have also been considered with some members of Congress and the Obama Administration pressuring the FHFA to do more.
Not only will relief programs benefit homeowners, but also the economy. HARP 2.0 has the potential to generate $350 billion in origination volume (Cognizant). In order to be effective and utilized, these programs and their agency administrators must facilitate and provide incentives for the private market lenders originating the loans, especially considering that participation is voluntary.
Brian Montgomery is the Vice Chairman of The Collingwood Group LLC.
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