Can banks be shamed into modifying mortgages?
With millions of foreclosures looming, only 1,711 homeowners have negotiated a deal.
The Obama administration this week said it planned to use a new weapon to persuade lenders to modify more troubled mortgages: shame.
Treasury Department officials plan to increase the pressure on the 71 companies participating in the government’s $75 billion effort to stem the foreclosure crisis, starting by sending three-person "SWAT teams" to monitor the eight largest companies' progress.
The goal is to increase the number of temporary mortgage modifications that become permanent. As of September, more than 650,000 borrowers had received temporary modifications but only 1,711 had seen a permanent modification.
In contrast, one of eight U.S. mortgages is in foreclosure or in default, noted a Congressional Oversight Panel charged with evaluating the administration’s efforts to stem the foreclosure crisis. That panel raised serious questions about whether the Home Affordable Mortgage Program (HAMP) would make a dent in the 10 million to 12 million foreclosures it estimates could be the result of the current crisis.
"It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now," the panel wrote.
For all the effort being spent on whipping companies into shape, though, there is much less energy going toward addressing the changing nature of foreclosure. HAMP was crafted to deal with the effects of the housing bubble: excessively easy credit let people buy homes they couldn't really afford and often with loans that carried spiking interest rates and payments.
The major difficulty now is the weak economy and rising joblessness. Under the U.S. government's plan, a modified loan payment must not account for more than 31% of a family's income. With unemployment north of 10%, in a growing number of cases, the mortgage isn't the problem -- the lack of a paycheck is.
Holden Lewis of BankRate.com’s Mortgage Matters blog lists three reasons he believes the program is failing:
First, mortgage investors believe that foreclosure is less of a money-loser than modification in most cases. Second, HAMP addresses the problem of payment shock from ARM rate adjustments, but nowadays loss of income is a bigger issue than payment shock. Third -- and this one is speculation -- I think some bankers are ideologically opposed to government efforts to help borrowers, and they're sabotaging HAMP.
Officials from Treasury, the Department of Housing and Urban Development, and the overseer of Fannie Mae and Freddie Mac engage in frequent conference calls with servicers to discuss best practices for resolving mortgage delinquencies. Yet little progress has been made.
Mortgage servicers are pretending to cooperate, while sabotaging HAMP and humiliating federal regulators. The Obama administration says it will shame wayward servicers by identifying them publicly, and it might even levy fines. But the big servicers are also the biggest banks, which have received tens of billions of dollars in bailout money. Something tells me that they won't be intimidated by fines of hundreds of thousands of dollars.
Servicers say one reason so few modifications have been made permanent is because homeowners have failed to submit the required paperwork, including proof of income.
But Yolanda Thomas of Queens, N.Y., said she submitted all the paperwork after receiving a temporary modification, only to be told five months later that her application was rejected and she could apply for another temporary reprieve, The New York Times reported. She had applied for the mortgage modification after she lost her job, exhausted her savings and then found a new job that paid much less. “At this point, I don’t know what is going on,” she told The Times.
We recently ran the “mortgage modification hell” saga of Andrea, a blogger at Fools and Sages, who tried for six months to get her mortgage modified but was finally rejected because her hardship -- a job loss -- was deemed “temporary.”
Homeowners who receive modifications may still be at risk of foreclosure later, noted the Congressional Oversight Panel, since most of the modified payments will rise after five years. And, some of the modifications add to the principal and therefore to negative equity for some borrowers.
In an analysis of the program, Floyd Norris wrote in The New York Times, “It is far from clear that some modifications being granted are really in the borrowers’ interests. Some will be able to stay in homes when they could rent a comparable house for less, and will be so far underwater that they are unlikely to be able to sell the house for years without defaulting on the new terms. It is conceivable that this process is doing more to drag out the foreclosure crisis than to alleviate it.”
That brings up another significant issue the mortgage modification program fails to address: the issue of homeowners who are “underwater,” owing significantly more on their mortgages than their homes are worth. That number has been estimated at nearly 23% of U.S. households with mortgages.
Plus, notes Time’s Kiviat, the plan also fails to address the issue of families that will never be able to afford their homes, even with modifications, so will need to sell them for less than they owe in what is called a “short sale.”
After announcing plans in May to improve the process for short sales -- which can take months -- the Treasury Department finally unveiled a plan this week, but it doesn’t take effect until April 5, 2010.
“SWAT teams” and twice-daily reports are unlikely to go far in resolving some of these difficult issues.
Still, if the administration can get mortgage servicers to deal fairly and efficiently with those customers who are candidates for a mortgage modification, that would be progress.
Just last week, a judge in Long Island, N.Y., was so outraged at how one servicer treated a couple who had tried to work out a deal that he cancelled their entire $525,000 debt.
What do you think of the administration’s approach to the mortgage crisis? Will “shame” have any effect or is it time for a new plan?
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