An article in last Friday’s Financial Times raises questions about the historic mortgage settlement between the five largest mortgage servicers in the United States, 49 state attorneys general, and the federal government.
The article, entitled “US taxpayers to subsidise $40 bn housing settlement,” argues that there is a taxpayer subsidy because modifications performed under the Treasury’s Home Affordable Modification Program (HAMP) are eligible for credit under the settlement.
In reality there is no such subsidy. Servicers cannot use HAMP incentives to meet their obligations under the settlement, plain and simple. Here are the facts.
HAMP pays incentives to encourage mortgage modifications. While those incentives occasionally include payments for reducing principal, most HAMP modifications do not include principal reduction.
The settlement does not give any credit for these HAMP modifications—those that involve payment reduction through a decrease in interest rate or an extension of the term, but no principal reduction. Of the almost 1 million permanent HAMP modifications done to date, the vast majority—more than 95 percent—fall into this category. Again, servicers do not receive any credit under the settlement for these modifications.
For HAMP modifications that do include principal reduction, servicers only receive credit for the portion of the principal reduction that they themselves pay for, not for the portion covered by incentives in the program. In other words, if a servicer receives a HAMP incentive of 40 cents for every dollar of principal reduction, it can receive credit at the applicable rate on the remaining 60 cents. However, in no event can the servicer receive more under the settlement than it would have in the absence of HAMP incentives. Thus, there is no “double” credit.
Before adopting this policy, we weighed a number of considerations, including:
First, why not exempt settlement-related modifications from HAMP altogether? Servicers no doubt would have preferred this alternative. It would have freed them from HAMP’s extensive compliance regime, reporting requirements, and borrower-protection features. For example, HAMP requires servicers to evaluate borrowers first for HAMP and then for all other alternative forms of assistance before proceeding to foreclosure. Unless we could be certain that all borrowers would be adequately protected by such an exemption, this did not make sense.
Second, why not require servicers to evaluate borrowers for HAMP and then provide settlement credit only for modifications of non-HAMP-eligible mortgages? This would result in a perverse outcome because it would make it less likely that HAMP-eligible borrowers would receive principal reduction. The purpose of the settlement is to help as many struggling homeowners as possible.
Finally, the Financial Times article suggests that the settlement may have been designed to increase HAMP’s numbers. This is not true. Whether people are helped through HAMP or through the settlement, this is not about who gets to take credit. It is about trying to stabilize a housing market that has been a drag on our economic recovery with all the tools we can muster.
The mortgage settlement is an historic agreement that 49 American states and the federal government worked hard to achieve—and it will bring unprecedented assistance to homeowners as our nation still works to heal from an unprecedented crisis. The settlement is a win for American homeowners.