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HAMP - A Knight in Shining Armor or an Ugly Sister

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By : John Smith    99 or more times read
On last Friday Washington announced further tweaks to HAMP of which the most profound is a provision for the downsizing of principal amounts to eliminate the underwater gap, and slow down American foreclosures which now top 300,000 a month. If this works, prices on the property market will stabilize and recovery will accelerate.

In doing this Obama is cutting with a two-edged sword – he’ll be both helping the unfortunate victims of the recession, and propping up dodgy speculators and risqué lenders with guaranteed FHA loans.

An anonymous Wall Street veteran has been quoted as saying “… investors in weak securitizations that were worth nothing last month will be swapping underwater real estate for government-insured paper… “.

To date the federal approach to the problem has been a combination of lowering rates, extending mortgage periods, and modifying troubled mortgages – while at the same time massaging the demand side with buyer inducements. So far nothing seems to have worked and just 4.25% of the 4,000,000 prospects have converted across. The jury is also still out on how the banks will react to Obama’s offer to part-share the pain of principal loan reduction – their mood to date has been to sit it out.

The other tricky question is how much banks and other investors stand to lose in the process. It could be substantial, but will still be better than staring down a double dip protected only by downgraded paper assets. In this regard it’s worth noting that the majority of mortgages are already part-paid meaning that the knock is going to be less in many cases than might be thought.

When the dodgy mortgages have been converted into FHA loans the banks will be free of risk again, thanks again to the generosity of the American taxpayer that they have been over-charging for years. This is why many analysts believe that HAMP is just one more sleight of hand, and that Washington is conniving once again with banks and other financial institutions.

Here’s how the program will work in practice:

  • Lenders are required to write mortgages down by at least 10% of the principal loan amount for compliant borrowers so that the quantum is no more than 97.75% of true value and the repayments are no more than 31% of monthly income.

  • This will enable more Americans to keep their homes, slowing the foreclosure rate and reducing the high inventory which is driving prices down.

Barry Ritholtz summed this up neatly in a recent interview with NPR’s Robert Seigel.

“These programs are designed to do two things. Firstly, they’re huge hand-outs to protect banks from foreclosure knocks and major write downs. Secondly, they do the politically correct thing of keeping Americans in houses they cannot afford which maintains a feel-good factor among voters.”

Notwithstanding the underlying motives, Obama’s tweaked HAMP is set to do better than before, although still not tackling the root cause of the problem and carrying a high cost factor with it. At the end of the day, houses prices must be allowed to react to supply and demand, house owners need to be more realistic, and federal authorities need to sort irresponsible underwater lenders who are being downright dishonest about the true state of their balance sheets.
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