Progress Report on Loan Modification Program
Nearly one year old, the federal government’s loan modification efforts continue to languish. In an attempt to galvanize the program, it has taken to releasing updates and report cards with increasing frequency. Unfortunately, these too appear to be having little success, which is why I have taken it upon myself to write my own progress report, for your viewing pleasure.
According to the latest figures, over 650,000 loans have entered the trial modification stage, during which point they must demonstrate their sincerity, eligibility, and capability, before they can be converted to permanent modifications. Specifically, they must make 3 payments under the new terms and submit certain documentation, that proves they are legitimately entitled to a modified loan. You would think that this wouldn’t be too difficult, but to-date, only 30,000 temporary modifications have been converted.
Naturally, there is no shortage of blame to go around. The government is blamed for not spurring more trial modifications (it originally estimated the pool of eligible borrowers at four to seven million). Lenders are blamed both for taking too long and for not granting increased leniency to borrowers, some of which are still seeing an increase in their monthly payments following modifications. Lenders counter that borrowers are also to blame, both for failing to make the required 3 payments under the trial modification and for not submitting the necessary paperwork.
Representative Jeb Hensarling’s assessment reflects what everyone is undoubtedly thinking: “Taxpayer-funded foreclosure mitigation programs have been an abject failure.” He and is leading the campaign to completely abolish the program. I’m partially playing devil’s advocate here, but perhaps it’s time to face the fact that this initiative was designed to fail. 25% of borrowers that received temporary modifications ultimately defaulted, while a handful of modifications have been handed to borrowers that weren’t even behind on making payments. Then, there are those that deliberately fell behind on their payments in order to receive payments, and those that are “naturally” behind by avoiding modifications because of the hit to their credit score that comes with the delinquency denotation reported to the rating agencies.
For better or worse, the program refuses to die; a new executive order prevents lenders from canceling temporary modifications “scheduled to expire before Jan. 31 for any reason other than property eligibility requirements.” Progressive Congressman, such as Barney Frank, are advocating alternatives, such as a program in Pennsylvania that makes low-interest loans to the unemployed that can be used to make mortgage payments. He is also trying to re-introduce a “cram-down” bill, that would give judges discretionary power to modify mortgages as they see fit. Finally, under pressure from the government, lenders have redoubled their efforts, in some cases bringing on more staff and opening new centers staffed exclusively to make loan modifications. Maybe there is hope after all…