by Calculated Risk on 1/01/2010 09:15:00 PM

From Peter Goodman at the NY Times: U.S. Loan Effort Is Seen as Adding to Housing Woes

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

... desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

The article covers a number of topics, but I think these are key:

For the people that qualify - and aren't deep underwater on their homes - HAMP is a fine modification program. However there is no way this program will "reach up to 3 to 4 million at-risk homeowners". I noted HAMP would probably be a disappointment when it was announced early last year:

This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

Treasury is terrified of a flood of new foreclosures. I believe that is why the Treasury issued a directive last week extending the trial modification period to at least the end of January.

There are several possible options:

More short sales. Short sale activity is already increasing, and the Treasury introduced the Foreclosure Alternatives Program to help with short sales and Deed-in-Lieu of Foreclosure transactions. However servicers are very afraid of short sale fraud (non-arm length transactions), and short sales are also distressed properties - pushing down prices - something Treasury is desperately trying to avoid.

Encouraging servicers to write down principal. This would be very expensive, and if paid for by taxpayers - it would be very unpopular because it would appear to favor speculators over the prudent. This is what Mark Zandi, chief economist at Moody's economy.com is supporting:

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
...
Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. ... “We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

Converting homeowners to renters. This is something Dean Baker suggested, and is kind of a Single Family Public Housing program. This would avoid the flood of foreclosures, and the banks could sell the homes over several years.

None of these programs is especially attractive, so I expect more delays and "can kicking" that will keep foreclosures elevated for years.