Like all great science fiction dictators, it turns out the Home Affordable Mortgage Program (HAMP) can bring the world order -- but at a terrible price.
The chart above, from the Third Quarter Mortgage Metrics Report [pdf], shows, for the first time since redefaults have been tracked in a systematic way, substantial evidence that very steep reductions in principal can keep bad borrowers in artificially inflated homes. This strengthens the arguments of HAMP expansionists like Elizabeth Warren, who say that the key to preventing house prices from finding their natural level is to haircut mortgage principal until it hurts.
Previous Mortgage Metrics reports, hamstrung by dubious early evidence, have had to engage in shilly-shallying and vague language to promote the idea that loan modification is worth doing at all, let alone at the massive scale envisioned by HAMP. Now a clearer picture is emerging: If you subsidize it, They will make at least one mortgage payment on time.
Is that success? I say a program where you spend $75 billion in taxpayer money and get a failure rate of a little less than half fails to meet the most basic cost-benefit criteria.
But then I would oppose taxpayer-backed loan mods even if they had a 100 percent success rate. The process violates all sense of personal responsibility, calculated risk, acceptance of consequences, and the many other habits that separate us from the beasts of the field. Since keeping bad borrowers in homes they can't afford also locks out future home buyers, the HAMP is not just immoral but patently destructive. Throw in that the Secretary of the Treasury, with his underwater home, and the head of the Federal Reserve Bank, with his exploding option-ARM, are completely interested parties in the practice of house inflation (in addition to their many other conflicts), and I think it's pretty clear that HAMP is finally succeeding at doing something that is bad for the free market, bad for America, and just plain bad.