New government efforts to reduce foreclosures face hurdles
The U.S. Treasury Department is trying to give its foreclosure-prevention program some teeth, but economists are doubtful they will be sharp enough to keep people in their homes and contain the avalanche of foreclosures expected to hit the market.
It’s a situation that bears watching regardless of whether you are personally concerned about a foreclosure.
That’s because a continued flood of foreclosures is a major hindrance to a recovery in home values and the housing market overall — which is now fragile at best.
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On Monday, Treasury announced a “Mortgage Modification Conversion Drive,” a new effort within the Home Affordable Modification Program (HAMP) – which was launched in March — to convert the trial modifications offered when a borrower first requests help into permanent changes to the loan terms.
Program well-intentioned but not cure-all
“This program is well-intentioned, and will have some success, but it’s not going to be a panacea,” says Michael Larson, a real estate analyst at Weiss Research.
According to the Treasury, loan servicers have offered more than 650,000 trial modifications under HAMP. But the Congressional Oversight Panel found that as of Sept. 1, 2009, HAMP facilitated 1,711 permanent mortgage modifications.
Treasury’s new initiative includes possible monetary penalties and sanctions for servicers that fail to meet performance obligations. “Servicers have not done a good enough job to bring permanent modification solutions,” Assistant Treasury Secretary Michael Barr said on a conference call Monday.
There are about 375,000 owners currently in trial loan modifications who are eligible to convert to permanent modifications by year-end, the Treasury said. But just one-third of homeowners have submitted complete documentation to their servicers, with the majority of borrowers in trial plans still owing some documentation.
This campaign is meant to “hold servicers accountable for timely decisions and push owners to submit documentation,” said Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office. The program’s initial aim of offering three to four million homeowners with modifications over the next three years still stands.
In an attempt to hold servicers more accountable, Treasury said it will send so-called SWAT teams – liaisons from the Treasury and Fannie Mae — beginning Wednesday to large mortgage servicing companies to facilitate the modification process. “They’ll be reporting back on the nature of issues arising in servicer shops that are preventing decisions from being made,” Caldwell said.
According to the Treasury’s November Servicer Performance Report, Bank of America has provided trial modifications to 14% of its eligible borrowers, while Citibank’s CitiMortgage unit has offered modifications to 40% of its eligible customers.
A Bank of America spokesman says Treasury’s “estimated-eligible” population for HAMP — of more than 900,000 customers – includes “large numbers who do not qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31% or is unemployed. Therefore, the true eligible population could be just one-third of this figure.” The bank says it has offered trial modifications to nearly 70% of its eligible customers. CitiMortgage wasn’t immediately available for comment. Overall, only 20% of eligible borrowers have been offered trial modifications, according to Treasury.
Here’s a look at some of the challenges for government efforts to stem foreclosures:
Underwater borrowers
The government’s modification efforts focus on servicers lowering borrowers’ interest rates or extending terms. But a key issue with HAMP is still the fact that many homeowners are underwater, meaning they owe more on their mortgages than their homes are worth. Without writing down the principal of the mortgage, the owner doesn’t have adequate incentive to stay in his home and make payments, says Larson.
According to the Mortgage Bankers Association, a record 9.6% of all borrowers were delinquent on their mortgage in the third quarter. (The delinquency rate includes loans that are at least one payment past due.) And about one-third of mortgages are underwater, according to the Congressional Oversight Panel October report.
Logistical issues
Workflow bottlenecks and incomplete documentation from borrowers have been blamed for the slow pace of modifications. The sheer volume of loans is swamping servicers and slowing down the mortgage workouts. “Nobody in the mortgage industry has experience with anything of this size and scale,” says Larson.
This problem could be eased by offloading some of the work from servicers to mortgage counselors, says Andrew Jakabovics, associate director for housing and economics at the Center for American Progress, a liberal-leaning think tank.
The calculation that determines eligibility for a modification is based on a mathematical model, called the Net Present Value model; the model’s inputs are relatively straightforward and consistent, Jakabovics says. “The counselor is doing triage anyway – they’re already looking at the [borrower’s] numbers… Just let them do the actual modification,” he says.
High unemployment
Foreclosures aren’t likely to let up as the unemployment rate – at 10.2% as of October – creeps higher. With unemployment high and house prices low, “you’re going to have a large wave of defaults and foreclosures no matter what you do,” says Larson.
The jobs picture isn’t expected to show improvement for some time: The Federal Reserve forecast that the unemployment rate will range from 9.3% to 9.7% in 2010, according to the minutes of the Fed’s Nov. 3-4 meeting released last week.
“The government will continue to try to ride these servicers and lenders. It will have some success, but none of us should be surprised by volume of foreclosures,” says Larson.
Source: http://www.smartmoney.com/Personal-Finance/Real-Estate/New-Efforts-to-Stem-Foreclosures-Face-Hurdles/
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