The 2009 Home Affordable Modification Program (HAMP), which provided loan servicers with sizeable financial incentives to renegotiate mortgages, was intended to help 3 to 4 million struggling homeowners. Instead, the program is benefiting just over a third of that target, according to a paper coauthored by Edward S. Gordon Associate Professor of Real Estate Tomasz Piskorski, “Policy Intervention in Debt Renegotiation: Evidence from the Home Affordable Modification Program,” published on August 30. The program also resulted in only modest reduction in foreclosures and did not alter the rate of housing price decline, durable goods consumption, or employment in regions with higher exposure to the program.
Using unique data from Treasury containing information on loan performance and modification rates of more than 30 million mortgages, researchers determined that a main reason behind the program shortfall had to do with the pre-existing organizational design of servicers—how many loans they had per employee, what type of training staff received, even how quickly they answered the phone. Those with stronger infrastruture, which tended to be smaller servicers, were better able to capitalize on the HAMP incentives. Unfortunately for homeowners, the larger bank servicers, in which some 75 of loans are concentrated, did not, and this limited the impact of the program.
The study finds that if these worse-performing banks had simply modified loans at the same pace as their better-performing peers, then HAMP would have produced about 800,000 more modifications, resulting in about 2 million modifications instead of 1.2 million by the end of this year. That’s still well short of the 3-4 million modifications President Obama promised when he announced the program in early 2009, but it’s a big difference and a reasonable, basic benchmark against which to compare the program’s failings.
The study concludes that “the ability of government to quickly induce changes in behavior of large intermediaries through financial incentives is quite limited, underscoring significant barriers to the effectiveness of such policies.” Piskorski noted in an interview that a possible solution for the future is the development of special mortgage servicers for distressed residential loans, similar to those operating in the commercial real estate sector.
Along with Piskorski, those working on the study were other academics and economists at U.S. government regulatory agencies: Sumit Agarwal and Gene Amromin at the Federal Reserve Bank of Chicago, Itzhak Ben-David of the Ohio State University, Souphala Chomsisengphet at the Office of the Comptroller of the Currency, and Amit Seru of the University of Chicago.
Please see the Housing and the Financial Crisis Research section for additional media coverage of this study.