Loan Modification Picks up Steam

The much-maligned Federal loan modification program appears to be gathering momentum, as the Obama administration recently announced that 500,000 mortgage loans have now been modified. This was hailed as a milestone, and the administration claims that it was reached ahead of schedule. Given the program’s slow start (reported in depth by the Mortgage Calculator), it is certainly cause for celebration.

Leading the pack are Citigroup, Wells Fargo, and Lehman Brothers, which have modified 33%, 20%, and 33%, respectively of their eligible loan pools. According to a government report, “In the second quarter, 78% of loan modifications involved actually reducing borrowers’ payments, up from 54% in the first quarter,” which means that “mortgage servicers became less likely to merely add missed payments to the balance of a reworked loan.” Even better, lenders have modified more than two million loans outside the auspices of the government program, through the industry alternative, known as the Hope Now program.

According to the government, the program aims to be even more successful, in terms of both individual lenders and on an aggregate basis. The stated objective remains 3 – 4 million modifications. Towards this end, the government will continue to incentivize lenders and release “report cards” on their progress.

Criticism of the program continues to pour on from all sides, however. Most of it is centered on the notion that the program is both naive and undercapitalized. Asserts one critic, “Borrowers whose mortgages are modified tend to default on the new terms at a high rate. Of the estimated 4.5 million homeowners in foreclosure or headed there with mortgages 90 days or more delinquent, the program ultimately will save only 1 million of them.”

In addition, there is concern that a fresh wave of delinquencies and potential foreclosures threatens to outpace the government’s efforts. To this, Treasury Secretary Geithner offered the following hedged response: “While the pace of loan modifications now exceeds that of new foreclosed loans, a ‘large number of families’ remain at risk of losing homes they might be able to afford if they could change their mortgage terms.”

There is even criticism coming from within the government, much of which is grounded in familiar partisan battles. Republican lawmakers argue that the $75 Billion budgeted for the program is wasteful and unnecessary, while their Democrat counterparts insist that additional funds need to be allocated. Despite the disagreement, “A Congressional Oversight Panel formally urged “Treasury to reconsider the scope, scalability and permanence of the programs designed to minimize the economic impact of foreclosures and consider whether new programs or program enhancements could be adopted.”

Finally, there are concerns that the program continues to benefit lenders and servicers, at the expense of borrowers. Lenders reap financial rewards for modifying loans even when the result is an increase in debt for the borrower. “These Treasury people are all from Wall Street, and they’re not doing anything but protecting Wall Street. They don’t care in the least about protecting homeowners,” argued one lawyer. The government, however, is doing its best to make sure loan modifications are carried out in an upright manner, and is in the process of officially prohibiting the charging of upfront fees in association with modifications. Progress is slow, but at least it’s progress.