Only A Third Of The Potential 4 Million Homeowners Benefited From Obama's HAMP Mortgage Renegotiation Program Due To Bad Organizational Design of The Program

75 percent of the mortgage loans potentially eligible for renegotiation under the HAMP program were in the hands of servicers who had neither the experience, expertise or staff to handle mortgage renegotiations. The lack of adequate planning by the President and Congress as to the ability of exisitng servicers to handle the increased volume of mortgage renegotiations led to the program's failure to meet the needs of most of its potential benficiaries.

Additionally, those homeowners who benefited from the HAMP program and who lowered their monthly mortgage payments did not use their newly available funds to stimulate the economy and make consumer purchases. The funds were used mostly to pay down other household debt.

From Columbia Ideas at Work, "Why Did the Home Affordable Modification Program Underperform?" by Tomasz Piskorski, Edward S. Gordon Associate Professor of Real Estate, Columbia Busienss School:

Yet four years later, only about one third of the 4 million homeowners estimated to potentially benefit from HAMP during its initial lifespan (through December 2012) have received modifications through the program.***Servicers with lower renegotiation activity had existing organizational designs that were much less conducive to mortgage modification. These organizations had smaller, less trained, and overloaded servicing staff, and servicing call-centers that were unable to efficiently handle a large number of calls. One of the most important differences among servicers is their ability to deal with distressed loans: some servicers have expertise in dealing with non-performing mortgages, while others only specialize in efficient processing of checks from borrowers.

These differences across servicers are economically important. Piskorski and his co-authors find that about 75 percent of loans are in the hands of servicers with organizational designs that were less conducive to renegotiations. This makes some sense because during “normal” times, it may have been efficient to just specialize in the mass processing of checks from borrowers.***However, their results also suggest that such programs targeted at distressed borrowers may not necessarily result in a sizeable increase in non-durable or durable consumption, at least in the near term.

Why is that the case? It appears that distressed borrowers use additional resources from debt reduction to pay down their other debt in lieu of spending on new consumer goods. These findings are consistent with arguments that the large accumulation of household debt prior to the crisis is an important factor limiting household consumption.

The analysis offers a lesson for policy makers and servicers: any policy intervention in response to foreclosure or other crises may face similar organizational hurdles and should be accounted for in its design. In the case of HAMP, for instance, modification rates might have been higher if the program had allowed servicing for modifications to be shifted to servicers that were better prepared to review, negotiate, and process modifications.