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MAKING HOME AFFORDABLE IS ... NOT.
Man, it is hard out there for a foreclosure plan. I had high hopes for the administration's plan to mitigate foreclosures by setting new standards for loan modifications and providing incentives for the financial sector to perform them, but the program is facing serious obstacles. That's not to bad mouth the efforts at Fannie Mae and Freddie Mac to provide affordable refinancing for certain borrowers, which are also under the MHA umbrella. But a variety of reporters, including myself, were able to badger the administration for real modification numbers last week and found that the administration's rather elegant plan has been seriously obstructed by the banks' lack of capacity and interest in modifying mortgage loans.
Why isn't MHA getting off the ground? About 50 percent of the initial problems seem to come from the challenge of trying to modify so many loans at once -- it's a lot of paperwork, and many servicers are still building capacity to handle the job. But Gretchen Morgenstern -- "the most important financial journalist of her generation" -- took a look at the underlying problem in her most recent column:
Lenders and their representatives, however, don’t like to modify loans through interest rate cuts or principal reductions because, of course, it reduces the income they receive from borrowers. No surprise, then, that loan modifications have been a trickle amid the recent foreclosure flood.
Seriously. It's become clear that the administration has not put enough pressure on the banks to get loans modified, either through more restrictions on TARP banks or bankruptcy loan modification, perhaps the most effective tool for tipping the scales in favor of the borrower. Unfortunately, financial-sector lobbyists killed bankruptcy loan modification in the Senate a few months ago.
Where does that leave us, and in particular those folks on the brink of mortgage default? Last week, I asked a senior Treasury official when the time would come for the administration to look at these numbers and decide to take a new tack; he dodged the question and instead said that coming into the first 100 days of the program (servicers began signing up in April), the administration was remaining focused on improving implementation. I don't think we'll see a major change in the loan mod program until bureaucratic problems are eliminated, leaving bank reticence as the sole problem, or when more accurate statistics about the program are available in the coming months. Treasury has already adjusted the refi portion of the program to make more borrowers eligible, at least. But I doubt it's any coincidence that Morgenstern's column coincided with a Times editorial calling for the administration to focus on a different kind of loan modification, writing down the actual amount owed, in order to speed up the plan.
But arguments that loan modifications will ultimately save servicers money in the long-term will not be enough to get them to act in the public interest. Zubin Jelveh has a good handle on why that might be, though I think the paper he references likely overestimates redefault risk since so many loan modifications made prior to the administration's new standards were cosmetic efforts to continue squeezing customers rather than good-faith efforts to create a performing loan. Nonetheless, when persuasion fails, it's time for action. How about bringing that foreclosure moratorium back? Or letting foreclosed borrowers rent their homes for some period of time? Mark this well, though: There won't be much of an economic recovery if foreclosures continue at their current pace.
-- Tim Fernholz
COMMENTS (7)
Thanks for your coverage of this issue. Even once servicers gear up and actually implement MHA, that implementation is going to be applied in highly problematic ways. The MHA Guidelines encourage lenders to offload their worst loans with government subsidized modifications while foreclosing on a population of borrowers who generally behaved more responsibly -- those who still have home equity because they did not overleverage their property.
Some servicers are ready and have already sent out trial MHA mods, while others will not offer anything under the program until August. I suspect the reason servicers are taking so long to implement the plan is that they are designing protocols that will allow them to gerrymander the program to disqualify loans they don't wish to modify, while qualifying others.
The amount of subsidy dollars available under MHA contracts are limited. Servicers will want to apply those subsidy dollars so as to modify loans that are severely underwater, while continuing to foreclose on homes that have positive equity.
Servicers will be able to successfully do this because they have a malleable range of values they can input into the seemingly bright line net present value formula that will allow them to disqualify borrowers that have plenty of home equity (and thus are more likely to entail substantial recoveries in foreclosure) and qualify borrowers who are underwater (and offer meager returns in a foreclosure).
Unless we keep a close eye on servicer implentation and encourage the utmost transparency, lenders will use this opportunity to yet again offload their worst assets to the taxpayer -- assets that from a fairness perspective, they should be the first to take a haircut on.
Posted by: Joseph S | July 6, 2009 9:38 PM
I should add that the reason lenders will want to apply MHA subsidies to underwater loans is that these loans are the most expensive to bring into a performing status through interest rate reductions, but under MHA the government subsidizes interst rate reductions. Underwater loans are more likely to correlate with inflated interest rates, inflated appraisals, lengthy delinquencies with little to no loss mitigation response, excessive servicer delay once a loan enters delinquency -- in other words, products of the lending industries most abusive and ennervating practices.
Posted by: Joseph S | July 6, 2009 9:42 PM
http://HomeLoanModification.dyndns.org, an advocacy group for homeowners in fear of foreclosure, will refer requestors to a loan modification attorney.
Why? Because the lenders all have attorneys, mortgage specialists and loan officers looking out for their best interests, who is one your side? All attorneys that HomeLoanModification.dyndns.org refers to give free Loan Modification initial consultations.
Posted by: Loan_Modification | July 6, 2009 11:35 PM
There is one more thing that I forgot to mention in my prior comment. I know the people that run http://homeloanmodification.dyndns.org and they are very reputable.
Thanks
Posted by: Loan_Modification | July 6, 2009 11:41 PM
I own a condo and have an outstanding balance of $140k, consisting of $104k primary and $36k secondary. I took the home equity to consolidate debts. At the time the property was valued at $163k but now it is valued at $134k. I'm looking to sell because i am engaged and will be moving into my fiancee's home. Check http://obamamortgage2009.blogspot.com/2009/03/obamas-mortgage-modification-do-you.html If I have a buyer who offers me within say $5-7k of the outstanding, can i agree to assume a loan on the residual and pay the bank the difference over time with interest? The same bank holds both mortgages.
Posted by: allenbarela | July 7, 2009 1:20 AM
The ability to refinance more easily means nothing if it doesn't save you any money. My loan servicer said I qualify for the program and they'd be happy to refinance my mortgage for $5,000.
I'd save $50/month, so after 100 months I'd be saving money!
Thanks a lot.
Posted by: Steve | July 7, 2009 4:18 PM
You can get a free Homeowner's Guide on President Obama's "Making Home Affordable" plan at http://MortgageCreditTrauma.com?03.
This plan outlines the rules and eligibility guidelines for 1st & 2nd loan modifications as well as giving a Loan Comparison Chart for Countrywide/BofA, CitiGroup/CitiMortgage, IndyMac Fed Bank and JP Morgan who is also accepting Washington Mutual and EMC Mortgage Corp customers.
Hope this helps!
Posted by: Taylor McKenzie | July 8, 2009 3:05 PM