Obama Administration "Shames" Mortgage Servicers

HUD and the Treasury Department are taking another crack at moving itsrnforeclosure prevention efforts from concept to reality.  And now it is adding “shame” to its list ofrnweapons.

The Department announced today that it intends to increase pressurernon lenders and servicers to move borrowers from trial loan modifications intornactual restructured loans.  The actionrncomes amid reports that the administration's $75 billion Making HomesrnAffordable Program (HAMP) is floundering.

While the government has been trumpeting the success of the trialrnmodification program – some 650,000 troubled borrowers had entered the programrnby the end of October – only a very small percentage of those borrowers have transitionedrninto a permanent loan modification.  Itrnis estimated that November figures will show completed modifications to numberrnin only the tens of thousands coming out of close to ¾ million trials.

The Treasury has announced plans tornassign officials to monitor the largest mortgage servicing companies on a dailyrnbasis and will require companies to develop and report their specific plans tornincrease the number of modifications they complete.  Loan servicers may face monetary penalties and sanctions if they fail to fulfill plans. Treasury is also expected to delay incentivernpayments to servicers until individual modifications are permanent.

The Wall Street Journal andrnothers are quoting Michael S. Barr, assistant secretary for financialrninstitutions who directs the HAMP program, as saying that banks are not doing arngood enough job.  “Some of the firmsrnought to be embarrassed and they will be. rnThey're not getting a penny from the federal government until they movernforward,” Mr. Barr said.  According tornBarr, the government will publicly identify lenders and servicers who are notrnperforming under the program and that they will be particularly focusing onrnthose companies that are not doing a good job.

It is hard to know where to place blame for the apparent failure of HAMP.  Some critics have said that the program isrnunworkable in that it was designed for last year's problems. It was supposed torncushion homeowners against the rate shock expected when the discounted teaserrnrate mortgages and option mortgages that were written during the housing boomrnreset.  Instead, foreclosures are now increasinglyrnhitting families who have suffered job losses and other financial setbacks andrncannot afford even the modified payments required under the program. 

Other critics have placed the blame squarely on the shoulders of thernbanks and servicers.  There are claimsrnthat servicers are profiting unduly from late and legal fees, that foreclosuresrnresult in a greater return than restructuring the loans, and that the servicersrnare entering into trial modifications in order to collect the incentives and tornwring a few additional payments out of defaulting borrowers.  Still others say that it is the investors whornactually own the mortgages who are unwilling to modify the loan terms.

There are also reports that servicers are apparently either unable orrnunwilling to handle the actual mechanics of the modifications.  Borrowers complain that they are cannot getrnthrough to appropriate departments, that the documentation they provide isrnrepeatedly lost, even that fax numbers are abruptly changed.

The servicers say that they are doing a good job and are making a goodrnfaith attempt to comply with the requirements and guidelines of the program.

According to the Times, there is now discussion in the Senate about arnnational foreclosure relief program based on one now in use inrnPhiladelphia.  In that city mortgagerncompanies are forced to submit to court-supervised mediation with the borrowerrnbefore they are allowed to proceed to foreclosure.  Democrats in Congress are also a low pushingrnto allow the bankruptcy courts to “cram downs” mortgage balances to an amountrncompatible with the current market value of the house.  

One has to wonder, might the plan to pressure loan servicers actually be counterproductive?

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