Treasury’s Home Affordable Mortgage Program relies on banks to volunteer modifications. Good luck with that.

Pat Garofalo reveals the fatal flaw in the Treasury’s HAMP program: Banks still have little incentive to modify mortgages.

Last week, the Treasury Department proudly stated that its Home Affordable Mortgage Program (HAMP) - the mortgage modification portion of the larger Making Home Affordable initiative - has resulted in 500,000 successful modifications. “That’s an important shift,” Treasury Secretary Timothy Geithner said.  “Half a million families are participating in loan modifications that are substantially decreasing their housing costs.”

Surely, half a million mortgage modifications are welcome, but they hardly put a dent in the devastating number of foreclosures occurring around the country. As Mark Zandi of Moody’s Economy.com said, “it’s a help on the margin…but it’s not going to end the foreclosure crisis.”  More than three million foreclosures were filed in 2008, and in the third quarter of this year 937,840 homes received a foreclosure letter. These numbers reveals just how minimal HAMP’s effect has really been.

And buried in the Treasury Department’s data is the crux of the problem: some banks are not doing anywhere near enough to help people keep their homes. Take Bank of America, which has thus far modified only 11 percent of the eligible mortgages in its portfolio. Other banks have even shoddier stats, like National City with nine percent of eligible mortgages modified, or US Bank and Wachovia, each with three percent.  Only one bank, in fact, has gotten to more than 40 percent of its eligible borrowers.

When it comes to permanent loan modifications (HAMP modifications start on a trial basis), the problem looks even worse, as one company - Ocwen Financial - is responsible for nearly half of them . Ocwen declared that it holds 45 percent of the 1,711 permanent modifications, while literally all the other servicers in the program are responsible for just 948 permanent modifications, combined.

The administration has been justifying the program’s slow start by saying that the banks haven’t had enough time to get their act together. As the Washington Post reported, BofA “has been hamstrung by a staff shortage and by adapting its computer systems and even fax machines to the scale of the program.”

Any program of this size and scope will be difficult for an institution to get its arms around, particularly a national one as large as BofA. But as BusinessWeek’s Theo Francis noted, “mortgage servicers actually signed up fewer homeowners in September than they did in August — 100,216 last month, down from 133,192 the month before. That was even below the 110,397 signed up in July.”  So the program is actually slowing down, not speeding up, as once would assume if Treasury’s claims are correct. Six months after the program began, excusing the banks’ performance by saying they haven’t had enough time is starting to wear thin.

The banks’ apparent inability or indifference to modifying mortgages reveals the fatal flaw in HAMP: Treasury is counting on incentives to entice banks into making modifications without enacting any consequences when those modifications don’t occur. And it doesn’t help that many mortgage servicers receive what the New York Times called “lucrative fees on delinquent loans,” potentially giving them a financial incentive to not pursue a modification, and instead follow through on a foreclosure.

Of course, it’s not fair to put HAMP’s design failures entirely on the administration or Treasury. As originally envisioned, HAMP was complemented by a change in bankruptcy law that would have allowed judges to “cram-down” mortgage payments for borrowers. In theory, banks would be more willing to pursue modifications if they faced the threat of having payments unilaterally altered by a judge in bankruptcy.

But the financial services industry put $42 million into an intense three-month lobbying campaign to defeat the cram-down provision (which prompted cram-down’s chief proponent, Sen. Dick Durbin (D-IL), to proclaim that the banks “frankly, own the place” ). In the months since cram-down’s defeat, nothing else has been put in place that would put any fear of a loss into a bank dragging its feet on a modification, and Treasury was unwilling to get behind a push for cram-downs when interest them was renewed by Durbin and Rep. Barney Frank (D-MA).

So at the end of the day, HAMP is stuck in neutral, reaching some borrowers, but not nearly enough to make a difference in the macroeconomic sense. And unless the banks voluntarily pick up the pace - or real consequences are put in place for failing to provide modifications - the foreclosure crisis will not abate.

Pat Garofalo is an Economics Researcher/Blogger for The Wonk Room and The Progress Report at the Center for American Progress Action Fund.