US recession deepens as home sales fall, foreclosures rise
Over a year ago US President Barack Obama implemented the Home Affordable Modification Program (HAMP) which was designed to help unemployed homeowners avoid foreclosures by allowing bank to lower interest rates and mortgages.
Reports show that the program has not quite succeeded. According to Realty Trac nearly 300,000 homes have been foreclosed upon and only about 30,000 have received aid from the HAMP program.
Economist Max Fradd Wolff from The New School in New York said the program has failed because it is the wrong program; it is merely a “band-aid on a bullet would.”
“The programs are much bigger than HAMP is really prepared to deal with and HAMP is rally a poorly designed program,” said Wolff.
Wolff explained that homeowners can easily refinance to get out of financial trouble when needed and home prices typically state constant or rise. However, that is not the current case because banks are being more particular in who they lend money too, thus fewer people are able to get finances to buy homes; causing prices to fall. Wolff said prices are off by about 25 percent to 30 percent and may go down by another five percent in the next 18 months.
Banks are turning away many who qualify for the program; however banks are nervous given their large financial losses over the past few years.
“Banks have learned the hard way. After the 2002-2007 mortgage orgy where almost everything with a pulse was given some kind of loan on the assumption that it was safe they could always get another loan if they got into trouble or sell their house because houses could only go up in value,” said Wolff.
He explained that the idea behind the assistance program was to offer aid through government purchasing of mortgages through Fannie Mae and Freddie Mac, with the idea that this would delay payments over a few years or months expecting the economy to have recovered. However, the problem, Wolff explained, is that unemployment and other economic issues have not been addressed and solved.
“This program wasn’t all that well designed. It was designed for a small program; the problem became big,” said Wolff.
The program was designed to make it look like the government was making a big effort, argued Wolff, when in-fact it was not.
“The main reason that banks aren’t stepping up to help homeowners is that they don’t have to,” said Prins.
She explained that the HAMP program was designed to be almost voluntary on the part of banks, had to choose to modify mortgages or work with certain buyers. Most banks opted not to participate because renegotiated mortgages cut into banking profits.
“The result is a failed program,” Prins argued.
The program can be viewed as another bailout for banks, she argued, since the money the banks received earlier from tax payers is not being pushed back into the system since the banks are not lending.
“The idea of the program was to circumvent foreclosures, but again on a voluntary basis, so it hasn’t helped,” said Prins.
The reasons foreclosures keep rising are because mortgage modifications are not being made and other economic issues, such as unemployment, have not been addressed.