HAMPering Obama's Home Plan By Peter Eavis The Wall Street Journal 12-02-2009

HAMPering Obama's Home Plan By Peter Eavis The Wall Street Journal 12-02-2009

HAMPering Obama's Home Plan
By Peter Eavis
The Wall Street Journal
December 02, 2009

The Treasury's anger is perhaps telling.

The Obama administration wants banks and loan-servicing companies to amend hundreds of thousands of mortgages so they are easier for borrowers to pay—usually without reducing the principal owed. But this weekend, a Treasury official said lenders weren't doing enough—suggesting public embarrassment for foot-draggers.

The Treasury's frustration may be warranted, but it needs to support its strong words with data showing banks and loan-servicers are at fault. Its absence suggests the administration is rattled. There is a good chance that the centerpiece of its homeowner bailout—the Home Affordable Modification Program, or HAMP—could flop.

This matters for investors. If HAMP stumbles and foreclosure-related sales ramp up, house prices could again slide. Such an outcome could be exacerbated if mortgage rates climb when the Fed ends its program to buy $1.25 trillion of mortgage-backed securities.

The HAMP works if two things happen. First, if a large proportion of mortgages in trial relief qualify for permanent modification. And then, if redefault rates on modified loans stay low. On the first score, the Treasury predicted Monday that 375,000 borrowers who began trial modifications should become permanent by year's end. That is 58% of those in trial. But if that total is reached because lenders, fearing government sanction, become too lax in approving borrowers, the redefault rate could be higher than expected.

HAMP's principle flaw is that it aims to reduce homeowner payments, while not creating further big losses for the banks or hitting the taxpayer for even more cash.

Even if HAMP does hit its targets, it could still leave a large number of underwater mortgages ticking in the system.


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