WASHINGTON -- The Obama administration's efforts to force the
modifications of distressed mortgages, while laudable, is likely to
fall far short because the foreclosure crisis has grown and threatens
to dwarf government efforts to relieve it, a special congressional
watchdog panel warned in a report released Friday.
The Congressional Oversight Panel, created to monitor how taxpayer
bailout dollars are being spent, warned that the administration's Home
Affordable Modification Program, or HAMP, announced in February, seems
sure to prove ineffective.
continue every day as Treasury ramps up the program, with foreclosure
starts outpacing new HAMP trial modifications at a rate of more than 2
to 1," the report said.
July 2007 through the end of August, 1.8 million homes were lost to
foreclosure and 5.2 million more foreclosures were started, the report
said. The HAMP program seeks to prevent between 3 million and 4 million
foreclosures; on Thursday, the Treasury Department announced that its
initial goal of having 500,000 trial mortgage modifications started by
Nov. 1 had been met.
The congressional panel wasn't critical of
those efforts; it simply said that they'll be swamped by changes in the
housing market. The economic crisis, with an unemployment rate of 9.8
percent and rising, is pushing many more prime mortgages, those given
to the most creditworthy borrowers, into default.
On top of that,
a new class of exotic mortgages called pay option adjustable-rate
mortgages and interest-only mortgages are due to reset to higher
variable rates. These exotic loans were usually given to richer
borrowers on fancy homes worth far less today than the value of the
underlying mortgages. These mortgages are often too high-priced to
qualify for government modification programs.
"It simply isn't
clear that the programs in place will do enough to tame the crisis and
have a significant impact on the broader economy," Elizabeth Warren, a
Harvard professor who heads the panel, said in the report. "It
increasingly appears that HAMP is targeted at the housing crisis as it
existed six months ago, rather than as it exists right now."
also may rise to levels far beyond what HAMP anticipated because a
growing number of homes are termed "underwater," or worth less than the
balance due on their mortgages.
"Today, one-third of mortgages
are underwater, and if housing prices continue to drop, some experts
estimate that one half of all mortgages will exceed the value of the
homes they secure," the report said. "Negative equity increases the
likelihood that when these homeowners encounter other financial
problems or life events cause them to move, they may walk away from
their homes and their over-sized mortgages."
Much will depend on
whether home prices have bottomed, as some economists think is
happening now. Housing prices have shown small but steady improvements
in most markets since March, according to Standard & Poor's
Low long-term interest rates and the
government's first-time homebuyer's tax credit have helped stabilize
prices, Patrick Newport, an economist with IHS Global Insight, told
Congress on Thursday. Home prices, adjusted for inflation, rose by 33
percent from 2000 to 2006. Today, prices are only about 13 percent
above their average value in 2000, a sign that a brutal correction has
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