Take yourself back to the good old days of 2006, when the Azzurri rightly ruled the football world and Lana Del Rey had not yet taken icicle form. With a good paying job, and only two more years of the Bush administration in sight, you decide to buy a summer home on Miami Beach. It is a good investment, you reason, until the real estate market collapse and leaves you several hundred thousand dollars underwater. And even though you've rented out the home since 2006 and kept your well-paid job, with about 20 percent of homes in America worth less than their mortgage it has been almost impossible to get a modification or refinance the mortgage to buy something more affordable.
Under a revised White House program, second homes—whether owned as a rental property investment, as a vacation home, or just as an extra mortgage from a house-flipping project gone array—are now eligible for taxpayer subsidies to reduce the principal on the underlying mortgage. This means that even though you made a poor investment decision with that home in Miami, taxpayers will now help foot the bill to reduce your mortgage by several hundred thousand dollars at little cost to you.
The program is called the Home Affordable Modification Program (HAMP), and it was started by the Department of Housing and Urban Development since 2009. You might have heard about it, as it is one of the Obama Administration's most widely panned programs.
Second (and third) homes had been "excluded" from federal programs to subsidize housing. But in the wake of changes to the federal refinance program announced in the State of the Union address last week, the Obama administration is now seeking to relax the rules on its loan modification program to increase its impact.
HAMP got started in early 2009 by using $29.9 billion from the Troubled Asset Relief Program (the bank bailout fund). It was supposed to work by offering payments to mortgage servicers in exchange for modifying the principal due on mortgages. However, nearly half of the trial modifications that were started ended in failure. And according to a monthly HAMP report in January, only 909,953 mortgages had permanent modifications through the program—costing the taxpayers an average of about $2,000 each so far. (See page 57 of the Inspector General report on TARP from last week.)
Since the goal from the start has been to modify as many as five million mortgages, the White House is moving to increase the pool of eligible mortgages by reducing the standards necessary to qualify. After all, it is not like reducing mortgage standards in order to accommodate more homeowners has ever been a policy leading to disaster before, right?
Mortgages on rental properties are now eligible for modification—meaning the total amount owed, not just the interest rate, may be reduced to avoid foreclosure. If the home you live in cost you $300,000 (plus interest on the mortgage) when you bought it, but now is worth just $225,000, HAMP could pay a lender to summarily knock $75,000 off the mortgage. If you own a second home and rent it out (even if that was not the original purpose of the home) you could get the same deal for a mortgage that started out at $700,000 but today is worth substantially less.
Remember when companies that bought insurance from AIG got paid 100 cents on the dollar from the September 2008 bailout? This is the same thing, except the recipients are people who flipped homes and were caught holding the hot potato.
Another part of the revamped HAMP is to triple payments (from between 6 and 21 cents on the dollar to between 18 and 63 cents on the dollar) for lenders and servicers who reduce the amounts owed on mortgages. This deal is open to both private lenders and to Fannie Mae and Freddie Mac (who essentially would be getting a subsidy from HUD to modify a mortgage before asking the Treasury Department to subsidize the rest of the losses). The program will also stay in effect until the end of 2013, instead of its original 2012 conclusion date.
The reality is that we simply have no need for this program. Even for those individuals who favor principal modifications as the solution to the housing crisis, there were still 2.6 million private modifications that occurred during the same timeframe as HAMP, without any subsidy needed.
At best, HAMP wastes resources for something that is being done better without the government's heavy hand. At worst, HAMP is dragging out the housing crisis by delaying necessary foreclosures. Either way, there is no good reason why investors who bought homes to rent or flip should be bailed out by the taxpayer.
Anthony Randazzo is director of economic research at the Reason Foundation.