Posted in the New York Times by E. Scott Reckard:
Lenders have temporarily restructured hundreds of thousands of loans, but long-term changes have proved elusive, raising the specter of a new wave of foreclosures.
In October 2008, JPMorgan Chase & Co. shaved 25% off Rick Mullen's mortgage payment by lowering his interest rate, helping him to stay in his Valencia home despite a downturn in his small business refurbishing large shipments of damaged shoes.
More than a year later, Mullen is grateful but frustrated, he says, because Chase has repeatedly lost his paperwork and never finalized what was supposed to be a three-month trial loan modification.
"I've talked to them at least 50 times, and it's always the same: . . . 'Oh, we're missing some documents, your modification is at risk,' " Mullen said. "How long are they going to keep me hanging?"
Loan-modification limbo is of high concern these days, not only to borrowers like Mullen but also to economists, consumer advocates and government officials pondering the fact that 1 in 7 U.S. mortgages is in foreclosure or past due.
Responding to an Obama administration initiative, lenders have temporarily restructured hundreds of thousands of mortgages, with hundreds of thousands more modified under the banks' own programs.
But achieving longer-term changes in the terms of mortgages has proved elusive, raising the prospect of a bigger wave of home repossessions that could cause a fresh decline in home prices only months after they appeared to hit bottom.
The Treasury Department announced in October that, after a slow start last spring, its Making Home Affordable loan-modification initiative had resulted in about 500,000 trial modifications. The department said the $75-billion centerpiece of its anti-foreclosure efforts was "on track" to meet its goal of offering at least five years of lower payments to as many as 4 million stressed-out borrowers.
But even after reporting this month that trial modifications had topped 650,000, the government still hasn't said how many of those loans have been permanently restructured. The Treasury Department says such numbers will be in next month's report on the program, which has been allocated $75 billion from the government's $700-billion Troubled Asset Relief Program bailout fund.
"You can't claim victory at 500,000 trial modifications and then have half of them drop out," said Paul Leonard, California director for the Center for Responsible Lending, a Durham, N.C.-based advocacy group.
At this point, converting 50% of the trial modifications into long-term restructurings might be considered an accomplishment. As of Sept. 1, with more than 350,000 trial modifications begun, the program had achieved just 1,711 permanent modifications, the oversight panel created by the TARP legislation reported, citing nonpublic Treasury data.
Laurie Anne Maggiano, director of policy at the Treasury's Office of Homeownership Preservation, said last month that the government had addressed the slow conversions by giving mortgage customer-service operations five months to make trial modifications permanent, up from three months originally.
Speaking to a Mortgage Bankers Assn. conference in San Diego, Maggiano said the government also had simplified paperwork for borrowers, who must make their reduced payments on time during the trial modification, submit an account of their financial hardship and document their income with pay stubs or tax returns.
Exactly what is holding up the conversions depends on whom you talk to.
"Getting these loans to the finish line is tough" for loan servicers, Chase Home Lending Senior Vice President Douglas Potolsky said at the San Diego conference. The main obstacle, he and other bankers said, is borrowers who don't properly complete their paperwork.
The story is different on the other side of the transactions.
"What you hear from loan counselors and a lot of borrowers," Leonard said, "is complaints about servicers who make multiple requests for the same thing, lose documents again and again, and change their requests for information in midstream."
Loan-servicing employees may know all about collecting payments but be clueless about the process of requalifying borrowers for modified loans, said Sam Khater, an economist with mortgage data firm First American CoreLogic. Getting income documentation is a major problem now that the era of "low doc" and "no doc" loans is long gone, he said in an interview.
The government program, mandatory for banks that accepted federal bailout funds, was announced Feb. 17, with its details unveiled the following month. It emerged amid widespread complaints that loan servicers were slow and inconsistent in modifying loans to keep borrowers in their homes, even though the lenders acknowledged that a foreclosure can give the mortgage holder a six-figure loss.
The initiative seeks to hold servicers accountable by providing a standardized format for restructuring loans and reporting progress on the efforts. It targets borrowers who are struggling to make mortgage payments that exceed 38% of their gross income.
The program pays subsidies to lenders who lock in "permanent" loan modifications that cut payments for at least five years. Lenders are supposed to reduce interest rates to as little as 2%, stretch out the time for repayment to as long as 40 years and suspend interest payments on some of the principal. The aim is to bring down the loan payment on a first mortgage, including taxes and insurance on the property, to 31% of the borrower's income.
The lender also has the option of reducing the loan balance. But in every case the lender must compare how much it expects to make on a modified loan with what it expects to recover if it doesn't alter the loan's terms, perhaps triggering a foreclosure or forcing a borrower to sell the home. If this "net present value" calculation shows a modified loan is more valuable, the lender is required to make the changes.
Ambitious as the attempt sounds, the TARP oversight panel says the Obama program appears too limited in scope and scale.
Meanwhile, the number of homes at risk of being seized in foreclosure continues to rise. In announcing the latest mortgage delinquency figures last week, Mortgage Bankers Assn. economist Jay Brinkmann said 4 million households were in foreclosure or were more than 90 days past due on their loans -- more than all the homes currently for sale.
If most of those loans prove beyond salvage, a new wave of foreclosure sales will further pressure the economy, Brinkmann said -- particularly in the hardest-hit sections of the country, like California.
Major servicers say their loan modifications, including proprietary programs supplementing the government-sponsored plan, are taking hold. Citigroup Inc. said this week that it helped about 130,000 distressed homeowners during the third quarter. Bank of America Corp. said it eased loan terms for about 100,000 former customers of Countrywide Financial Corp. under a settlement of state regulators' accusations of predatory lending by the giant Calabasas mortgage lender, which BofA acquired last year.
Neither Citigroup nor Bank of America would disclose how many trial modifications offered under the Obama plan had been made permanent. They and other lenders said the government had requested that such information be kept private until next month's official announcement.
In a news release last month announcing that it had offered 125,000 modifications using the government plan, Bank of America said it began achieving "significant gains" in trial modification starts in August. "On that basis," the company said, "the company expects its conversion of customers into permanent modifications under the program will begin showing substantial progress in December."
Barbara DeSoer, Bank of America's president for home loans, said in an interview last month that the bank "was pulling loan officers out of sales and putting them into servicing" to help get borrowers into permanent modifications. The loan officers, who are used to talking over complex personal financial issues with customers, have "a better pull-through rate," DeSoer said.
One lender that has achieved a high rate of trial modifications is Saxon Mortgage Services Inc., a Morgan Stanley subprime unit. Robert W. Meachum, executive vice president at Saxon, said its employees were more used to dealing with struggling borrowers than loan servicers at prime lenders were, and had been authorized to make quick decisions. But he acknowledged last month that of Saxon's 35,000 trial modifications, the number made permanent was in the hundreds.
Taking another tack, Fannie Mae has hired four outside firms to send people to knock on the doors of customers who didn't respond to modification proposals or needed help with their paperwork.
The giant mortgage purchaser has had "favorable results" with this labor-intensive effort at "borrower engagement," Fannie Mae spokeswoman Amy Bonitatibus said Wednesday.