At age 64, Brenda Reed of Lafayette is reaching a point in life when most of us expect to rest on our accomplishments. Instead, she faces starting over from scratch as she braces to lose her home through foreclosure.
"It's pretty grim. I'm going to have to figure out plan B," she says. "And I don't know what plan B is going to be. ... I'm a Vietnam War widow. I run a bed and breakfast business out of my home. If I lose my home, I lose half my income."
Reed's dismal state of mind can be traced in part to a government program that has painfully dragged out the inevitable road to foreclosure, filling her with false hope and putting her through months of paperwork before leaving her still hopelessly in debt and soon to lose her home.
Reed, who owes about $500,000 more on her loan than her house is worth, is among the hundreds of thousands of people who pinned their hopes on the Obama administration's Home Affordable Modification Program (HAMP). The idea was to encourage loan services to renegotiate the terms of delinquent mortgages, so that residents might remain in their homes rather than be foreclosed upon. Instead, many of them have been strung along for months, before ultimately either losing their homes anyway or remaining in limbo.
After filling out mountains of paperwork, Reed was given a three-month trial period in which she would be allowed to make reduced loan payments while the bank considered whether to cut a permanent, lowered-payment deal.
But like a reported 616,000 other struggling homeowners, she was bumped from the program without a satisfactory explanation. "They said I don't fit into the HAMP box," she says.
The U.S. Treasury launched HAMP in March 2009 to offer incentives for loan servicers to modify the terms of mortgages facing foreclosure. The idea, President Barack Obama said, was to give up to four million homeowners lower mortgage payments through a modification over three years.
And why not? Millions of homeowners owe far more than their houses are worth. Many of them can't make payments. According to August statistics from the real estate website Zillow, 19.6 percent of San Francisco Bay Area homes are underwater, and the San Francisco Business Times cited a report last week that estimated there are 2.3 million homes with negative equity in California. If mortgage lenders wished to avoid the costs of foreclosure, it might be in their interest to cut a deal — right?
Wrong — at least in most cases. As of July, only 422,000 mortgage modifications overseen by the government were considered permanent; half as many homeowners ended up like Reed, navigating a Kafka-esque approval process with nothing to show for it.
Now, Treasury officials are reportedly moving the goalposts.
Conceived as a way to get borrowers back on track, HAMP now seems to merely have allowed banks to delay facing their own problems.
"The number of trial and permanent modifications that have been cancelled substantially exceeds the number of homeowners helped," a General Accountability Office report on the Troubled Asset Relief Program (TARP) stated in July. "One continuing source of frustration is that the Treasury has rejected calls to announce publicly any goals or performance benchmarks for HAMP."
How could a program based on the seemingly commonsense idea that banks should renegotiate terms of underwater mortgages turn into a weapon of mass frustration?
That seemingly illogical situation can be traced to the tortured rationales behind the government's housing-based efforts to stave off further U.S. economic decline.
Job one has been denial: keep delinquent mortgages off lenders' books, prevent additional bank failures, avoid further bailouts, and pump up housing prices to keep builders working and consumers spending.
Hiding the truth about home values is something banks have been happy to play along with. Whereas foreclosures might take a few months in better times, banks and loan servicers are sometimes waiting a year or more to face the reality of mortgages gone bad.
"There's a lot of phantom inventory that could be foreclosed in a twinkling, but they're not," says Mountain View attorney Cathleen Moran, a certified bankruptcy specialist who has helped many clients who have failed to enroll in the HAMP program.
The ratings agency Standard & Poor's reported in June that it would take at least three years for banks to sell the foreclosed houses they've withheld from the market. That doesn't include selling delinquent mortgages on which they've postponed foreclosure.
If lending institutions acknowledged all the bad or near-bad debt on their books, declared asset values would plunge, causing all sorts of problems, adds U.C. Berkeley economist John Quigley, director of the university's Program on Housing and Urban Policy.
Among those problems: Trillions of dollars' worth of U.S. mortgages are owned by government-chartered lenders Fannie Mae and Freddie Mac. Since Sept. 2008, the U.S. Treasury has backed those institutions financially. So true market-level mortgage markdowns might require the equivalent of a stimulus package just to relieve troubled mortgage holders.
HAMP was touted as a cheap alternative. But it was doomed to fail.
In part, that was because the 2000s were an orgy of all kinds of borrowing — not just ill-advised mortgages. Millions of maxed-out homeowners are a bad risk, even if their mortgage payments are cut. Standard & Poor's estimates that as many of 70 percent of HAMP participants could redefault.
"It's deplorable," Quigley says. "But it's not terribly surprising that these voluntary programs don't work." But it has "worked," in the sense of possibly allowing banks to postpone recording the loans on their books at decimated postrecession values.
"The underlying problem is that if we wrote all this stuff down to truly what it's worth today, every bank would be insolvent," Moran says. "So part of what we're playing is a shell game. As long as we're able to keep from recognizing that the assets on the balance sheets of these banks are worth markedly less than their face value, we can sustain the illusion that they're solvent as long as we put an artificially high value on the properties."
But mass denial in the housing market actually serves as economic-recovery-impeding sludge.
A homeowner stuck in an underwater mortgage in California's Central Valley may be less likely to take that promising new job in Austin — the type of career mobility that might help him and the rest of the economy to progress.
Houses in California, Arizona, and the rest of the country sit empty because buyers believe prices will continue to fall. If sellers listed them at more realistic prices, however, millions more people might be able to buy affordable homes. The market might finally hit its true trough and bounce upward. Enhanced employee mobility might lubricate the job market. And restored consumer confidence could boost the economy further still.
But such a scenario would be expensive, because the government could be forced to shore up lenders now propped up by phantom, falsely priced inventory. Meanwhile, a wave of face-the-music foreclosures would dislocate millions of families.
In Washington, that simply isn't an election-year option. Instead, we have HAMP, which was touted as an inexpensive way to get bankers to face facts, yet has merely managed to torture already aggrieved homeowners.
Joe Kautz of San Mateo County has been applying and reapplying for the program since last May and getting no definitive answers: notwithstanding, a Wells Fargo rep questioned the $300 monthly food budget in his financial statement "as if I'd cheated on my taxes," he says.
San Francisco homeowner Kepa Askenasy did hours of paperwork over three months, during which she was advised incorrectly by a Bank of America employee on how to fill out certain forms before she was ultimately disqualified from the program. "They didn't appear to know as much as I did" about program requirements, she says.
As for Reed, HAMP's main achievement of postponing the inevitable has been no solace. "I'll have to relocate to Tennessee and live off the kindness of my family," she says. "We Southern girls don't do that very well. I'm fiercely independent. I raised a family on my own. I took care of myself all these years. It's terribly disturbing."