Housing Policy

First Smart Move In a Long Time: Government Surrenders on Second Mortgages

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Second mortgages are not worth bailing out.

One of many ill-advised pieces of the Home Affordable Modification Program may be getting a quiet retirement. The Second Lien Modification Program, which was announced back in April, seems to be on the skids. Calculated Risk puts the story together:

Housing economist Tom Lawler emailed the HAMP administrative website to obtain a list of servicers who had signed up for the Second Lien Modification Program. Here is the response he received:

"That program is currently on hold and there is no list of servicers that registered before it was placed on hold."

This is not an official announcement, and the Treasury office I'm trying to confirm with has been known to take three weeks to answer a pretty simple question. But assuming the program really is suspended, that could be reflective of several things. It may be impossible to get second lienholders to go along with the program (which would explain why "there is no list"). It's possible that so many second-mortgage situations are beyond hopeless that there's no point in starting the effort. It is also possible the $75 billion HAMP program is running short on cash, though given the total value of claimed modifications so far, that seems unlikely.

We all must bend over and accept our circumstances.

In a reaction at the OC Register's real estate blog, Matthew Padilla says the suspension notice is "not a good sign." But in fact, it's an excellent sign. Bailing out bad borrowers is bad policy to begin with, but bailing out second mortgages shocks the conscience. It may not be quite axiomatic that if you are carrrying a second mortgage and you are in default you are by definition not a responsible borrower. But it's as close as anything could be to axiomatic.

Yet the HAMP website predicted the second-lien program would "reach approximately 1—1.5 million responsible homeowners who are struggling to afford their mortgage payments." And Congressional Oversight Panel Chairwoman Elizabeth Warren keeps saying bailing out second liens is the solution to the real estate crisis.

These arguments are getting less traction as time goes by. The destination media have lately begun taking an interest in HAMP's counterproductive results. The HAMP's underwhelming numbers, ineffectiveness, and costly efforts to limit redefaults (which have met with limited success) have been well documented. And the public, which never even wanted to bail out responsible homeowners, can't get excited about saving somebody's cigarette-boat-financing HELOC. If the Treasury Department is looking at that grim battlefield and putting up a white flag, that's the better part of valor.