Mortgage Servicers Come Back From the Woodshed
Reacting to, and frustrated by the slow start of the Obama Administration’s foreclosure rescue plan, Treasury and HUD officials met with executives from 25 mortgage servicers and pressured them to do whatever it takes to ramp up the pace of loan modifications for struggling homeowners. The initial goal, as set by administration officials, is to have 500,000 trial modifications under way by November 1st. A trial modification is the first phase of a loan modification where homeowners make reduced payments for a period of three months while the terms for the loan modification are finalized. There are approximately 200,000 trial modifications in progress currently.
Officials from 25 mortgage servicing companies, including Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co., were summoned to the meeting two weeks ago to cover issues with the program and ways to improve it. Off to a slow start, which has had many industry watchers doubting whether loan modifications could attain the lofty goals set by the administration, the program is starting to get a modest amount of traction. “We are on track to meet our goals,” Treasury Secretary Timothy Geithner said optimistically after the meeting. “Still, too many homeowners are at risk of foreclosure right now.”
The Home Affordability and Stability Plan is the cornerstone of the Obama administration’s effort to stabilize the housing market but, entering its sixth month, has been buffeted with complaints from homeowners regarding long waits for low quality help, re-submission of lost documents, and customer service representatives that don’t quite understand the program. Other issues have been foot dragging by the servicers who didn’t adequately hire or train staff to handle the flood of applications and requests that poured in when the program was announced.
Bank of America Corp. is only this month beginning to implement the Obama plan guidelines for all at-risk borrowers, a company spokeswoman said. Bank of America has been putting such borrowers on their own plan which allows them to make a partial mortgage payment for several months and then be considered for a loan modification. Wells Fargo & Co. didn’t begin offering some at-risk borrowers loan modifications under the Obama plan until early June. One issue was that mortgage servicers were waiting for final federal guidelines on key issues such as the net present value test, which determines whether a loan modification is preferable to a foreclosure, said Mary Coffin, head of loan servicing for Wells Fargo Home Mortgage.
There still remains a high degree of pessimism regarding the role of loan modifications including a research report from the Federal Reserve of Boston which concluded that servicers might prefer foreclosure over modification for a majority of cases. Other analysts immediately said the administration’s goal of ramping up the pace of loan modifications is misguided. Completing 500,000 trial modifications is “overly optimistic,” said Anthony Sanders, a real-estate finance professor at George Mason University in Fairfax, Va. One big concern, he said, is that if mortgage-servicing firms are pushed to make further modifications, the banks could suffer even more losses. The alternative to loan modifications is foreclosures which would probably put greater losses on the books due to the huge and growing backlog of foreclosures across the country.
Part of the pessimism stems from the fact that lenders, servicers, and investors have been walking a fine line trying to navigate through loan modifications, foreclosures, and how to minimize booked losses. In many cases, the easiest solution has been to leave everything in limbo while searching for optimal solutions. The hesitancy in how best to proceed has led to a slowdown in the processing loan modifications, much to the frustration of homeowners and the administration alike. While older studies on loan modifications have emphasized high re-default rates as a flaw in the loan modification model, early returns from more recent loan modifications are hinting that lowering payments in combination with principle reductions yield modifications that perform much better than earlier versions.
Other items on the agenda included:
* Expansion of access to the program to additional homeowners, such as those with mortgages insured by the Federal Housing Administration. The FHA is expected to implement changes to its loan-modification program which would bring it more in line with the HASP guidelines according to a HUD spokeswoman at the meeting.
* The simultaneous modification of first mortgages and home equity loans which are commonly owned and serviced by different parties resulting in redundancies in effort and documentation.
* Further government assistance with the problematic option ARM mortgages due to the continuing troubles with the mortgages and upcoming payment recasts which could start a second wave of foreclosures in the category.
Administration officials have promised that by Aug. 4 they will begin posting performance information on individual mortgage-servicing companies, including the number of trial modifications offered to eligible borrowers and the number of trial plans that are under way.
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