Mortgage Modifications: Can They Succeed in Current Crossfire?

The Obama Administration’s mortgage modification effort to rescue homeowners from foreclosure is caught in a crossfire.

On one side, the lenders say they are struggling to get borrowers on board with tough paperwork rules that require additional staff – a bureaucratic “struggle,” a top lender called it.

On the other side, administration officials are now formulating financial penalties and other actions against the mortgage servicers that they determine are not keeping pace.

Caught in the middle of the this feud are desperate homeowners trying to avoid losing their homes by seeking lower monthly payments under the government’s Home Affordable Modification Program (HAMP).

Mortgage industry experts have criticized both sides. They primarily say the program, as directed by government agencies and administered by lenders, has failed to address a key issue: the many homeowners, including a growing number of prime borrowers, stuck in “underwater” mortgages, or negative equity, because their home is valued less than the sum of outstanding loans against the property.

Julia Gordon, senior policy counsel at the Center for Responsible Lending, said HAMP cannot succeed unless lenders reduce the mortgage principal of the homeowners in the program.

“There are two main reasons why addressing the question of equity position is so important: the incentives to homeowners to continue to perform on their loans, and the ability of the HAMP program to help people in payment  option ARM and interest-only loans,” Gordon said. “Many analysts believe that principal reduction is ultimately  the only way to help the housing market reach equilibrium and begin to recover.”

Treasury Secretary Timothy Geithner said last week that the government is prepared to re-shift the focus of its primary bailout program to bolster HAMP, as well as small business lending. The Treasury expects to recover all but $42 billion of the $364 billion in bailout funds disbursed in fiscal year 2009.
 
Industry experts say that shifting bailout money to help reduce mortgage principals could be the turnaround strategy that HAMP needs to succeed.

Officials with Treasury and Department of Housing and Urban Development officials have vowed to streamline the paperwork, simplify the process and extend time-lines. But they will also require more transparency on the part of the lenders to determine if they are doing enough.

In essence, lenders will have to come up with more paperwork. The administration’s crackdown is to require “a schedule demonstrating plans to reach a decision on each loan for which they have documentation.” Moreover,  officials said they will meet regularly with mortgage servicers to “identify necessary improvement to borrower outreach and responsiveness.”

“We continue to work very hard to convert customers from a trial modification to a permanent modification that lowers their monthly payment, but it has been a struggle,” said Charlie Scharf, head of Retail Financial Services at Chase, part of JPMorgan Chase & Co.

Chase has made permanent 4,302 mortgage modifications, second highest after GMAC Mortgage, according to the most recent monthly report on HAMP by the U.S. Treasury. Only 31,382 modified mortgages have been converted to permanent status, out of 728,000 underway, the administration said last week.

The admission by the Chase official is rare, but reflects frustration among the large lenders.

“We want to give customers every opportunity to make their modifications permanent,” Scharf said. “We have hired thousands of employees and expanded our outreach, and we have begun to see some improvement in results. We believe our intensified efforts, plus the heightened awareness of these issues, will help further encourage struggling customers to make every effort to complete their modification.”