What Hath HAMP Wrought

Paul Muschick at the Morning Call explains the new FTC rules for mortgage rescue companies:

Starting Jan. 31, companies that offer foreclosure relief services will be prohibited from collecting payment before providing services. They can’t collect until they provide a homeowner with an acceptable written offer from the loan holder…

Some states already have prohibited the collection of advance fees. Pennsylvania prohibits them unless a licensed broker obtains a penal bond to collect advance fees, which very few brokers do, said Ed Novak, spokesman for the state Department of Banking. The federal law will preempt the state law, meaning even brokers with bonds can’t accept advance fees.

Despite the protection Pennsylvania tried to provide, several people in the Lehigh Valley area lost money when they paid mortgage rescue companies and didn’t get services.

Paul goes on to point out that the reason these scam artists have flourished is because HAMP has been such an utter failure:

But one reason homeowners seek help from mortgage rescue companies is that the federally sponsored solution to the foreclosure crisis, the Home Affordable Modification Program, hasn’t helped nearly as many people as projected.

It was set up as a way to repay the public for the public money that bailed out banks when they were in trouble. Banks were supposed to ease the terms of some mortgages to help people stay in their homes.

The Obama administration had projected the program would help up to 4 million homeowners by 2012. But through October, only 483,342 active permanent modifications had been granted, and the number of trial modifications that had been canceled outnumbered the number of active trials by more than four-to-one.

That’s pathetic. Is it not yet obvious to Congress and Treasury that the current approach of trying to nudge servicers into voluntarily modifying mortgages is not going to work? Congress needs to pass cramdown. If the threat of bankruptcy judges reducing principal balances is lurking in the background, banks will get serious about working with distressed borrowers. The alternative seems to be deleveraging through massive defaults.