A new study by the Federal Reserve Bank of Chicago and several academics has concluded that banks that were poorly staffed and whose employees were inadequately trained were responsible for 800,000 foreclosures that were unnecessary and could have been avoided with loan modifications through a federal program.
The study’s authors — from the Federal Reserve Bank of Chicago, the government’s Office of the Comptroller of the Currency (OCC), Ohio State University, Columbia Business School, and the University of Chicago — arrived at this conclusion by analyzing a vast data set available to the OCC. They wanted to measure the impact of HAMP, the government’s main foreclosure prevention program.
What they found was that certain banks were far better at modifying loans than others. The reasons for the difference, they established, were pretty predictable: The banks that were better at helping homeowners avoid foreclosure had staff who were both more numerous and better trained.
Unfortunately for homeowners, most mortgages are handled by banks that haven’t been properly staffed and thus have modified far fewer loans. If these worse-performing banks had simply modified loans at the same pace as their better performing peers, then HAMP would have produced about 800,000 more modifications. Instead of about 1.2 million modifications by the end of this year, HAMP would have resulted in about 2 million.
HAMP is the Home Affordable Modification Program, a federal program that provided subsidies to encourage banks to modify mortgages for certain borrowers rather than foreclose on the homes. Many critics at the time said the program would fail because the modifications are voluntary and built on encouraging banks to modify loans rather than forcing them to do so. This study would seem to back that up.
If 800,000 fewer homes had been foreclosed on, the impact on the economy, and on tax revenue at the state and local level, would have been pretty significant.