GOPideas... ideas done right

Yesterday’s post and my initial post on the Home Affordable Modification Program (HAMP) focused on the fact that the Obama Administration is bullying lenders to give away equity to people who are mortgage delinquents. However, the more troubling aspect of the program is that HAMP does nothing to allow for price discovery, maximize the lenders recovery of the troubled asset or even ensure that individuals who engaged in criminal activity do not benefit from their malfeasance. Thus, even for those who argue that individuals experiencing financial hardship should have the legal capacity to abrogate their mortgage contracts, the following steps can be taken to ensure that the unlucky can be separated from criminal and dishonest.

--- Ensure that fraudsters are ineligible for HAMP modifications: The FBI defines mortgage fraud as:

Fraud for housing represents illegal actions perpetrated solely by the borrower. The simple motive behind this fraud is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentations regarding his income or employment history to qualify for a loan                

Thus, borrowers who falsified (i.e. overstated) income to qualify for a mortgage are not just dishonest, but criminals. The HAMP program makes no attempt to ensure that these criminals are denied taxpayer-funded assistance (let alone prosecuted). This can be remedied by requiring (or at least cross referencing) the applicant’s tax return for the year of their mortgage origination with the original loan documentation as a precondition for any modification. Surely some leeway should be granted for an unexpected bonus or cut hours that lead to an income shortfall, but if the stated income on the mortgage application is 25% higher than the actual income reported on tax returns, the borrower should then be forced to choose: assume the income level stated on the mortgage application was accurate (and then be forced to pay back taxes and penalties for understating income) or agree that their misrepresented their income to qualify (and then be prosecuted for mortgage fraud). If this is not done, then a person who committed a crime is being rewarded with taxpayer dollars.

--- Promote price discovery: One of the challenges in the current housing market is determining the “fair value” of a house --- and the easiest way to do that is to sell it. In addition, bear in mind that the real “victim” of someone not paying his/her mortgage is the lender. Thus, the most just solution is to ensure that the lender takes the smallest haircut possible. This can be done by having a 30-day waiting period from the time a mortgage is modified to the time that modification is accepted --- and put the house on the market for a price higher than the agreed-upon modification. In that time period, post the house and the terms of the modification online and allow anyone else who is willing to pay more to purchase the house. This has dual purposes: 1.) to ensure that the lender maximizes the yield from the property and 2.) to ensure that the current occupants do not game the system (if the lender can only negotiate with the current occupant, then the lender has no other option, whereas the occupant can always walk away). This solution ensures that if the current occupant has the ability to pay at their current rate, they will do so to ensure that they do not lose their home.

--- Make all modifications recourse loans: Mortgages are non-recourse loans, which means that if the borrower decides to cease payments, even with the ability to pay, the lender is unable to lay claim to other assets. Thus, even is the borrower has millions in cash, 401ks, 529s and IRAs, the lender still must eat the loss. The HAMP program should at least specify that those borrowers who are being subsidized today must agree to recourse loans. Otherwise, the currently-defaulting borrower is being handed a taxpayer-funded lottery ticket: the loan is written down and any appreciation accrues to the borrower. However, if the market continues to fall, the borrower can still walk away, without recourse, again.

Regardless of how people feel about the HAMP program, both sides should be willing to agree that a.) difficult times may call for extraordinary measures to help people, but b.) that help should be limited to people who are honest and are willing to make a good faith effort to repay their mortgage.