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    Cornell Real Estate Review

    Volume 10 Article 9

    7-2012

    HAMP: Doomed from the Start

    Marc Gans

    University of California, Los Angeles

    Follow this and additional works at: hp://scholarship.sha.cornell.edu/crer

    Part of the Finance and Financial Management Commons, and the Real Estate Commons

    is Article is brought to you for free and open access by e Scholarly Commons. It has been accepted for inclusion in Cornell Real Estate Review by

    an authorized administrator of e Scholarly Commons. For more information, please contact [email protected]

    Recommended CitationGans, M. (2012). HAMP: Doomed from the start. Cornell Real Estate Review, 10, 54-71.

    http://scholarship.sha.cornell.edu/crer?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer/vol10?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer/vol10/iss1/9?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://network.bepress.com/hgg/discipline/631?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://network.bepress.com/hgg/discipline/641?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPagesmailto:[email protected]:[email protected]://network.bepress.com/hgg/discipline/641?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://network.bepress.com/hgg/discipline/631?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer/vol10/iss1/9?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer/vol10?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPages
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    HAMP: Doomed from the Start

    Abstract

    e collapse of the American housing market has had deleterious eects on not only the U.S. economy, but

    also the global economy, plunging much of the world into the worst nancial crisis since the GreatDepression.

    Keywords

    UCLA, real estate nance, Home Aordable Mortgage Program, Troubled asset Relief Program; Fannie Mae;Freddie Mac; home ownership, single family residential, mortgage, mortgage nance, Cornell, real estate

    is article is available in Cornell Real Estate Review: hp://scholarship.sha.cornell.edu/crer/vol10/iss1/9

    http://scholarship.sha.cornell.edu/crer/vol10/iss1/9?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPageshttp://scholarship.sha.cornell.edu/crer/vol10/iss1/9?utm_source=scholarship.sha.cornell.edu%2Fcrer%2Fvol10%2Fiss1%2F9&utm_medium=PDF&utm_campaign=PDFCoverPages
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    Cornell Real Estate REview

    5454Cornell Real Estate REview

    Marc Gans, J.D. Candidate,

    UCLA School of Law, 2012, B.A.,

    Political Science, University of

    California at Los Angeles, 2007,

    is an Articles Editor of the UCLA

    Journal of Law and Technology.

    He has served as a judicial extern

    for the Honorable George H.

    Wu of the Central District of

    California.

    Author

    by Marc Gans

    Introduction

    The collapse of the American housing market has had deleteriouseffects on not only the U.S. economy, but also the global economy,plunging much of the world into the worst financial crisis since the

    Great Depression.

    In the U.S., a record 3.8 million foreclosure filings (default notices, scheduled auctions,

    and bank repossessions) were reported on 2.8 million properties in 2010.1 This was an

    increase of almost two percent from 2009 and an increase of 23 percent from 2008.2 2.23

    percent of all U.S. housing units received at least one foreclosure filing during 2010. This

    was up from 2.21 percent in 2009, 1.84 percent in 2008, 1.03 percent in 2007, and 0.58 percent

    in 2006.3 Foreclosures in 2011 were down 34 percent from the previous year 2.7 million

    filings on 1.45 percent of all housing units but these numbers still represent levels not seen

    before the recent financial crisis began.4 Moreover, this decrease is largely attributable to

    the documentation and legal issues plaguing the industry; foreclosure activity is actually

    projected to be higher in 2012.5 More than one in four American borrowers are currently

    underwater, and over four million borrowers owe at least twice as much as their homes are

    worth.6

    The Bush Administrations attempts at stemming the foreclosure crisis are widely

    considered unmitigated failures. In 2007, President Bush announced that the Federal

    Housing Administration (FHA) would launch a program called FHA-Secure, which would

    allow homeowners with good credit history, but who could not afford their current payments,

    to refinance into FHA-insured mortgages.7 The number of delinquent conventional loans

    refinanced with FHA-insured mortgages was zero in fiscal 2007, 3,794 in fiscal 2008, and 316in fiscal 2009 - a total of 4,110.8

    In January 2008 President Bush created Hope for Homeowners, a program that set aside

    $300 billion to refinance toxic loans.9 There were zero loans refinanced in fiscal 2008, 23 in

    fiscal 2009, and 48 in fiscal 2010 - a total of 71 loans over three years.10 A major reason for its

    failure is that lender participation was voluntary and new loans were limited to 90 percent

    of appraised value. Appraised value had already decreased significantly, so lenders were

    not willing to take losses.

    In February 2009, the Obama Administrations response to the foreclosure crisis was

    1 Record 2.9 Million U.S. Properties Receive Foreclosure Filings in 2010 Despite 30-Month Low in December,REALTYTRAC, Jan. 12, 2011, http://

    www.realtytrac.com/content/press-releases/record-29-million-us-properties-receive-foreclosure-lings-in-2010-despite-30-month-low-in-de-

    cember-6309.

    2

    Id.3 Id. Nevada has the highest foreclosure rate in the U.S., with more than 9 percent of homes receiving at least one fo reclosure ling in 2010.

    Arizona is next, at 5.73 percent, followed by Florida at 5.51 percent. Overall, ve states - California, Florida, Arizona, Illinois, and Michigan

    - account for 51 percent of the nations total foreclosure activity in 2010.

    4 2011 Year-End Foreclosure Report: Foreclosures on the Retreat, REALTYTRAC, Jan. 9, 2012, http://www.realtytrac.com/content/foreclosure-

    market-report/2011-year-end-foreclosure-market-report-6984.

    5 Id.

    6 Drowning or waiving: The policy options for alleviating Americas huge negative-equity problem, The Economist, Oct. 21, 2010, http://

    www.economist.com/node/17305544.

    7 Peter G. Miller, Obama Mortgage Modication Plan 100 Times Better Than Bush,The Hufngton Post, Aug. 25, 2010, http://www.

    hufngtonpost.com/peter-g-miller/obama-mortgage-modicati_b_694059.html

    8 Id.

    9 Id.

    10 Id.

    HAMP: Doomed From The Start

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    Cornell Real Estate REview

    55Cornell Real Estate REview

    55

    the Home Affordable Mortgage Program (HAMP), designed to help as many as 4 million

    borrowers avoid foreclosure by the end of 2012. HAMP was the largest part of a broad

    array of programs called Making Home Affordable (MHA), which itself was part of the

    $700 billion Troubled Asset Relief Program (TARP) bailout. $75 billion was originally set

    aside to fund MHA ($50 billion under TARP and $25 billion from Fannie Mae and Freddie

    Mac).11 HAMP required participating loan servicers to reduce monthly payments to no

    more than 38 percent of the borrowers gross monthly income, with the government then

    chipping in to bring the payments down to no more than 31 percent of monthly income. 12This paper will critique the effectiveness of HAMP and its companion programs, and

    dissect what went wrong. This will include an analysis of strategic defaults, strategic

    defaults and the motivations of the servicers. Lastly, this paper will lay out proposed

    solutions and advocate what would have been the best solution from the start.

    I. HAMP & Related Programs

    HAMP is available to qualified borrowers to modify first liens on primary residences

    made before January 1, 2009. The first-lien mortgage payment must exceed 31 percent of

    the borrowers gross monthly income. Only single-family properties with mortgages no

    greater than $729,750 for a one-unit property are eligible.13

    Under HAMP, costs are shared between mortgage holders (investors) and the federal

    government. Investors take the first loss in reducing monthly payments to no more than

    38 percent of the b

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