Obama Administration About To Turn Up The Heat On Mortgage Servicing Industry Over Sluggishness In Making Loan Modifications?

A column in The New York Times reports on an invitation recenly extended(1) by the Treasury & HUD Secretaries to the top 25 mortgage loan servicers to get together in Washington on July 28 for a chat:

• The subject of the meeting is going to be loan modifications. Specifically, the government is going to be asking — in none-too-friendly fashion — why the nation’s big servicers aren’t doing more to modify loans for homeowners who are in danger of defaulting on their mortgages. Back in the spring, after all, they all signed onto the administration’s new Making Home Affordable program, which uses a series of incentives — not the least of which is $1,000 to the servicers for every mortgage they modify — to help keep people in their homes and prevent foreclosures. And yet, five months later — and two years into the housing bust — the rising tide of foreclosures remains the single biggest threat to economic recovery.

Among the reasons cited by loan servicers for their difficulties in modifying delinquent loans are:

• The volume of loans is overwhelming servicers,
• The process is a one-on-one process that requires servicers to actually underwrite the loan, many of which were not properly underwritten when originated (“Servicers have to become full-blown underwriting shops,” according to one loan servicing firm CEO).

However, some suspect the continuing lack of incentive for the lenders and servicers in accomplishing loan modifications as being equally or more compelling reasons for the sluggisness surrounding the loan modification effort:

• Many times, when a mortgage holder falls behind, he will “self-cure” (as it’s called in the trade) — and eventually get current with his mortgage. So the bank, or the servicer, often has a reason to simply wait him out,

• The rate of re-default on modified mortgages can be as high as 50 percent, resulting not in foreclosure avoidance, but merely foreclosure postponement,

• Many institutions also are reluctant to do large-scale mortgage modifications because the write-downs of the portion of the loans they'll have to eat will hurt their balance sheets,

• The length of time it takes to complete a foreclosure can take a long time, enabling lenders to keep the loans on their books at their inflated values,

• The $1,000-per-modification being dangled by the government was pretty meaningless, given the amount of time, money and effort they require, according to some in the industry.

For the story, see From Treasury to Banks, an Ultimatum on Mortgage Relief.
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Thanks to Mike Dillon at GetDShirtz.com for the heads-up on the story.
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(1) From the story:

• That letter the administration sent out on Thursday did not mince words. It demanded that the servicers begin “adding more staff than previous planned, expanding call centers beyond their current size, providing an escalation path for borrowers dissatisfied with the service they have received, bolstering training of representatives, developing extra online tools, and sending out additional mailings to borrowers who may be eligible for the program.”