It’s easy to throw melons from the cheap seats but I will resist the temptation to harshly critique the programs put in place by both the Obama and Bush administrations to assist distressed homeowners and stop the bleeding in home values. However, a helpful lesson can be taken away from this experience...

“Real life has more variables than the small set he has chosen to estimate.” -Nasim Taleb, Black Swan.

What I mean by that is government sponsored and engineered programs like Help or Homeowners, HomeSaver, HAMP, HARP, etc, etc have struggled to stay ahead of an unprecedented amount of unknowns in the housing market. Consequently,  these programs have ended up fighting yesterday’s wars. Initiatives first focused on delinquent borrowers, then negative equity, then unemployment and income qualification barriers, then short sales and deed in lieu, and so on and so on.

Further exacerbating the challenge of "staying ahead of the game" is that with each new market development and each new aid program offered to address new inefficiencies, there is a corresponding adjustment that must  take place by the folks who carry out the implementation of newly announced assistance programs.  That means loan servicers must be quick to grasp all proposed modifications, identify all systems and process updates, and then retrain (or hire) their staff to properly execute new rescue strategies. I can only imagine the expense and capacity burned up to comply with these program, not to mention the lines of code that will become obsolete in the next 12-24 months. 

It has become clear that programs intended to address the masses are not efficiently aiding the individual. Each homeowner’s situation is different and requires a different style of loss mitigation and default management resolution, yet we are still using broad based guidelines instead of specialized judgment - we are using prescriptive “rules” that change from program to program. When describing their most successful interactions with distressed homeowners, loss mitigation professionals use terms like “getting in the ditch with the borrower” – “pick and shovel work” – “blocking and tackling” vs. “let me see if you qualify to keep your house.”

There’s a good reason that proprietary modifications outnumber HAMP modifications 5 to 1 – they are based on guidelines that can be managed by folks that have the authority and capacity to make sound judgment based decisions. They approach the situation as follows...

  1. Is there a legitimate hardship? Is it temporary or permanent?
  2. What can the borrower afford to pay in the form of free cashflow (true income and liabilities)?
  3. What are the employment conditions for this borrower's profession? Current and expected.
  4. What is the current NPV and how sensitive is this specific home market to further shocks?

Unfortunately much of the disappointing results seen in government sponsored housing rescues can be attributed to servicers who ineffectively administer aid programs . Servicers have never been categorized as “dynamic”. Servicers have always measured their success leading up to the crisis in terms of their efficiency – not their flexibility and speed of response. So it’s easy to see now how even the most brilliantly conceived and engineered loss mitigation programs would falter if the folks implementing them are not properly equipped.

To borrower the metaphor – servicers are a lot like “hedgehogs” and housing policy is being doled out by “foxes”.

Hedgehogs view the world through the lens of a single defining idea and are generally only able to operate off of that single idea. Foxes on the other hand build their perspective through a wide variety of experiences and thought processes.  In the case of servicers, they know how to collect and remit payments as quickly and as cheaply as possible. They are not set up to formulate fast solutions to the many pronged problems seen by the fox.

We need to give the folks who carry out housing aid programs an opportunity to apply logic to each and every individualized scenario. We need less big picture policy engineering and more common sense.