Tuesday, July 12, 2011

One reason HAMP failed

A remarkable interagency group of economists wrote a paper that investigated the NPV test that is at the heart of HAMP: for a borrower to get a loan modification, the value of the modification must be on net greater than zero (or in the case of Fannie-Freddie loans, greater than -$5000).  In other words, the losses from expected default must be greater than the losses from modification.

An upshot of this rule is that borrowers who are deeply under water get no modifications--because the chance their loan will in the end cure is very small.  This means that borrowers in places that need HAMP most--Las Vegas, Phoenix, Florida, etc.--are least likely to get it, all else being equal.

It also underscores a basic point: in places where values have fallen by more than, say, 50 percent, anything less than principal balance relief just delays the inevitable.  When households in, say, Central California want to move or retire, their house sale will not be sufficient to cover their loan balance.   Even moving to make short sales easier would help.  Otherwise, it is hard to see how we can restart the market anytime soon.

7 comments:

Austin Kelly said...

But the NPV pass rate for underwater mortgages is over 95% (see table 1 in the paper). Surely this effect can't be a major reason for "HAMP failed," at least not in the sense of not reaching enough borrowers.

And I wasn't sure that we could be called "remarkable" economists, but here I am, proving that I am able to make a remark, so I guess this post is proof that I am "remarkable" at least in that sense .

Michelle said...

Back to the drawing table...

Richard K. Green said...

But Austin, deeply underwater loans don't pass...so if nothing else it says that HAMP can't help the worst cases. I don't know--it just seems goofy to me.

rjs said...

you cant look at housing in isolation...with most americans carrying a large mortgage, credit card &/or student loan debt, household balance sheets will continue to be under pressure from negative wage gains, which are even worse adjusted for inflation...we need rising wage raises across the board to get out of this balance sheet recession…lower wages, such as we are seeing in the recent reports, just digs a deeper debt hole for everyone...

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