HAMP Class Action Lawsuit

The Housing Preservation Project, a public interest law firm in St. Paul Minnesota, filed a class action lawsuit in Minnesota federal district court today alleging that the federal government's loan modification program violates Constitutional procedural due process requirements. Pursuant to its press release, the " lawsuit alleges that the program fails to provide homeowners with proper notice and a right to appeal decisions by loan servicers administering the program." The lawsuit seeks to enjoin Minnesota mortgage foreclosures until the government promulgates the necessary procedures to ensure HAMP fair administration.

The lawsuit is reportedly "modeled after similar lawsuits filed in the early 1980s, which sought and successfully stopped all farm foreclosures until the government ensured that the farmers’ procedural due process rights were not violated when administering a similar foreclosure prevention program." Count one of the complaint alleges that the failure to promulgate rules requiring servicers to provide notice of denial under HAMP is a violation of the fifth amendment's protection of procedural due process and alleges that there has been a lack of promulgated regulations, guidelines, and rules for servicers. Count two alleges that the failure to promulgate rules requiring servicers to provide a right to appeal is a violation of procedural due process. A memorandum in support of the motion for a preliminary injunction was filed.

Hearings on Foreclosures Before Joint Economic Committee

The Congressional Joint Economic Committe held a hearing today entitled "Current Trends in Foreclosures and What More Can be Done to Prevent Them" to investigate the ongoing foreclosure crisis in the residential housing market. It is reported that the Committee "will review past federal regulatory failures" and efforts by the current Administration and Congress to address the situation.

Congresswoman Carolyn Maloney remarked that the foreclosure crisis is not striking evenly across the U.S. and that there are heavy pockets of concentration in certain areas such as California, Florida, Illinois, Massachusetts, Nevada, and New Jersey.

Professor Joseph R. Mason explained that the following factors are among those why mortgage servicers are having difficulties dealing with distressed mortgages: 1. mortgage modification is expensive to service, 2. mortgage arrearages hurt servicer's profits as they have to advance the mortgage payments to the investors, 3. mortgage servicing fees cease upon default, 4. increased fees to do not cover typical increased costs, and 5. difficulties in retaining staff. He also noted that mortgage investors, such as Aaa-class investors and senior bondholders, are weary that the current policy may be gamed by the servicers to protect its interests, such as maintaining the value of the servicer's residual or interest-only strip or to allow the release of overcollateralization to the servicer.

Dr. Susan M. Wachter noted that foreclosure rates are presently four time the historical average and the highest since the Great Depression. She stated that the residential foreclosure crisis began with a wave of subprime mortgages and that the next wave will be payment option mortgages. She also explained that the crisis will abate when home prices stop falling as "level of prices determines whether it is possible to repay the mortgage upon sale." Dr. Wachter further stated that mortgage servicers may lack the incentive and capacity to provide mortgage modifications, that loan modifications with principal write-down are necessary, and that regulatory supervision is necessary to avoid a failure of regulatory and market structure such as the present which triggered a crisis and brought down the system.

GAO Report to Congress: HAMP Needs to be More Transparent and Accountable

The U.S. Government Accountability Office (the "GAO) released its report dated July 23, 2009 to Congressional Committees entitled: "Troubled Asset Relief Program - Treasury Actions Needed to Make the Home Affordable Modification Program More Transparent and Accountable."

The GAO reports that the first-lien mortgage modification effort under HAMP "may not fully meet Treasury's goals." The GAO further states that Treasury's estimate of the number of borrowers who would likely be helped under its HAMP loan modification program "may be overstated" as it may reflect data gaps and faulty assumptions, including rates of borrower response and servicer participation. The reports also notes that Treasury has not finalized all of the processes for the implementation of HAMP and is not systematically evaluating servicers' capacity.

The report states that as of July 20, 2009, only about 180,000 borrowers have started trial modifications.