Posts Tagged ‘HAMP’

How HAMP failed homeowners

August 23, 2012

Click to enlarge.

Neil Barofsky, the former special inspector general for the TARP program, said the Home Affordable Modification Program was not intended to protect homeowners from foreclosure, but to stretch out the foreclosure process so that banks wouldn’t be overburdened.   This chart from the New York Times shows that only a quarter of homeowners who asked for HAMP assistance got help—a higher proportion than I would have expected, based on what I’ve read.

In Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, Barofsky said the program was full of perverse incentives.  The official purpose of HAMP was to allow qualified homeowners to modify their mortgage payments and avoid foreclosure.  But the administration of the program was put into the hands of mortgage service companies, which were paid by the banks to collect payments and process foreclosures.  While the mortgage-holders might have benefited from mortgage modifications in some cases, the service companies got higher fees if they foreclosed and sold the properties.

Barofsky said HAMP was structured so that it was more profitable for mortgage service companies to stretch out payments and then foreclose than to award quick permanent modifications.  Servicers were allowed to charge and accrue late fees when borrowers were in trial modifications, even though they were fully paid-up; the fees were supposed to be waived if the modification was granted, but could be collected if the home was sold through foreclosure.

It was to servicers’ benefit to accidentally-on-purpose lose documents, Barofsky wrote, because that stretched out the process and provided an excuse to charge penalties.  A survey by ProPublica, an investigative journalism organization, showed that borrowers had to submit documents an average of six times.

Barofsky said some servicers would tell homeowners that if they deliberately skipped a mortgage payment, they could qualify for a HAMP modification.  This would make them liable to late fees and penalties, and sometimes the servicer would foreclose anyway.

Click on Slow Response to Housing Crisis Now Haunts Obama for the full New York Times article.

Click on Secret Docs Show Foreclosure Watchdog Doesn’t Bark or Bite for a ProPublica report on HAMP.

Click on Bungled Bank Bailout Leaves Behind Righteous Anger for a recent Neil Barofsky column for Bloomberg News.

Hat tip for the chart to The Big Picture.

An inside story of the Wall Street bailout

August 16, 2012

Neil Barofsky was special inspector general for the Trouble Asset Relief Program from December 2008 to March 2011.  His new book, BAILOUT: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, told me a lot about not only of the failures of the Obama administration, but of the dysfunctional culture of Washington, D.C.

In Barofsky’s early days in Washington, he was kindly advised not to be too abrasive or controversial.  Herb Allison, the former Merrill Lynch executive who was the so-called “TARP czar,” told him that if he played the game, he was assured of moving on to a good job either in Washington or Wall Street; otherwise, he would be unemployable.   That is also what Senator Richard Shelby (R-Alabama) told him—that if he did his job right, he would make a real difference and serve the American people in a meaningful way, and he also would never be able to get a job again.

His account makes U.S. government seem like the court of King Louis XVI in 18th century France.  Everybody was obsessed with protocol, rank, status, privileges and keeping in the good graces of the powers that be.  Having a big office was very important.  High officials were flattered as if they were demi-gods.  Barofsky wrote that he made up his mind early on that he was going to do his job well and then get out.

He was a federal prosecutor in New York who prosecuted Colombian drug lords and white collar criminals.  A Democrat, he was appointed in the waning days of the Bush administration after Congress insisted on the IG position as a condition for approving TARP.  Treasury Secretary Hank Paulson gave him the cold shoulder, but Treasury Secretary Timothy Geithner was downright hostile.  He learned early that the secret of influencing the executive branch is to have friends in Congress, and the secret of influencing Congress is to cultivate the press, which he did.

His report is another confirmation of the failure of the Obama administration to bring Wall Street under control.  According to Barofsky:

  • Secretary of the Treasury Timothy Geithner basically trusted the banks to manage their own bailout.  They were lent $4.7 trillion, not just the $700 billion authorized by Congress, with no significant audit or supervision, under conditions in which they could hardly fail to profit.  In one case, a couple of bankers literally designed a program which they then proceeded to administer, to their great profit.
  • The purpose of the bailout was to get credit flowing into the economy again for consumer loans, home mortgages and financing for small business, but this didn’t happen, and nothing was put in place to assure that it would happen. Barofsky conceded that a bailout probably was necessary in late 2008 to prevent a financial collapse, and that the banks repaid most (not all) of the money advanced.  But he said there was no need to bail out the banks at 100 cents on the dollar, and no justification for refusing to audit how the money was spent.
  • The Home Affordable Modification Plan (HAMP) was never intended to provide help homeowners avoid mortgage foreclosures, but rather, in Geithner’s words, to “foam the runway” for the banks—that is, to stretch out the foreclosure process so that banks and mortgage servicers would not be overwhelmed by having more foreclosures than they could handle.  Barofsky said Geithner resisted audits and measures to protect homeowners from fraudulent mortgage servicing programs.
  • There is nothing in place to prevent another financial crash, as bad or worse than the one that went before.  The only thing different is that government has authority which will make possible future bailouts without going to Congress.

While Barofsky’s book did confirm my low opinion of Secretary Geithner, it did raise my opinion of Congress.  Barofsky was able to accomplish what little he did—a few audits, a few successful prosecutions for fraud—through the support of courageous Democrats and Republicans in Congress.  I have a higher opinion of Senator Shelby than I did before, although qualified by the fact that he is a highly partisan Republican who anti-labor, anti-civil rights, and opposed to creation of a Consumer Financial Protection Board.

Barofsky currently is a senior fellow at New York University School of Law.

The following brief segments from PBS’s Newshour provide an impression of Barofsky’s personality, background and thinking.