Loan servicers have committed to "significantly increasing" the pace at which they negotiate loan modifications with homeowners facing foreclosure, the Obama administration said in announcing a new goal of achieving 500,000 trial loan modifications by Nov. 1.
More than 200,000 trial modifications are now under way under the under the Making Home Affordable Loan Modification Program (HAMP). But in announcing the program in February, the administration said it hoped it would eventually help as many as 4 million homeowners avoid foreclosure by providing up to $75 billion in subsidies, insurance and financial incentives to loan servicers and borrowers (see story).
Housing Secretary Shaun Donovan said challenges to completing loan modifications and strategies for improvement were discussed at high-level meetings Tuesday between loan servicers and government regulators, leaving him confident "that we can ramp up … to meet these ambitious goals."
The administration had also hoped a companion program to refinance loans owned or guaranteed by Fannie Mae and Freddie Mac would help as many as 5 million families who owe more than their homes are worth. That program is also off to a slow start and was recently expanded to make homeowners with loan-to-value ratios of up to 125 percent eligible for refinancing (see story).
The Home Affordable Refinance Program (HARP) expires June 10, 2010, while HAMP modifications must be in place by Dec. 31, 2012.
Earlier this month, Donovan and Treasury Secretary Timothy Geithner wrote to 27 loan servicers participating in the HAMP program, complaining of "substantial variation" in their performance and inconsistent results in converting loan-modification offers into actual trial modifications.
Many analysts project that more than 6 million families could lose their homes in the next three years if more isn’t done, Treasury Assistant Secretary for Financial Stability Herb Allison told lawmakers at a hearing this month.
Loan servicers need to add more staff, expand call-center capacities, provide a process for faster decisions, bolster training, enhance online capabilities, and send more mailings to potentially eligible borrowers, Allison said (see story).
The administration plans to begin issuing public reports on individual loan servicers’ success in achieving loan modifications beginning Aug. 4.
The reports will include the number of trial modification offers each servicer has extended to eligible borrowers, the number of trial plans that are under way and the number of final modifications. When numbers become available, the reports will also track the long-term success of loan modifications.
But in a recent public policy paper, "Why Don’t Lenders Renegotiate More Home Mortgages?" staff researchers at the Federal Reserve Bank of Boston said there may be more than logistical obstacles to speeding up the pace of loan modifications. …CONTINUED
Loan modifications have become "public policy holy grail" because they supposedly help borrowers and lenders at little or no cost to the government, the paper said.
But because many seriously delinquent borrowers are able to get back on track without a loan modification — and because many borrowers who are granted a workout or loan modification end up redefaulting — lenders may, on average, expect to recover more by foreclosing on a home than by modifying a loan, the paper concluded.
Although the Boston Fed looked at loan modifications performed in 2007 and 2008 — before the HAMP program took effect — its findings illustrate some potential pitfall for lenders negotiating loan modifications.
The data showed about 30 percent of seriously delinquent borrowers "self-cured," or started making mortgage payments again without receiving a loan modification. The implication for lenders (or investors who funded the loans) is that they run a risk of renegotiating with delinquent borrowers who don’t need assistance, the paper said.
Between 30 and 45 percent of borrowers who received loan modifications ended up in serious delinquency again within six months, the study found. In markets where home prices continued to fall, loan servicers were then left with the prospect of an even smaller recovery if they were forced to foreclose in the future.
Consumer advocates and other supporters of loan modifications say borrowers are more likely to redefault when they are offered workouts that don’t reduce their monthly payments, instead of loan modifications that include lender concessions like principal or interest-rate reductions.
During the period studied by the Boston Fed, only 3 percent of seriously delinquent borrowers received loan modifications involving a concession, and less than 8 percent received any type of workout at all. Most renegotiated loans granted by lenders involved increases to principal balance — most likely because amounts in arrears were tacked onto the back of the loan, the paper said.
The percentage of borrowers who were able to renegotiate their low terms was "extremely low," the paper observed, considering that foreclosure proceedings were initiated on about half of the delinquent loans studied and completed on almost 30 percent.
But by the end of the study period, loan servicers were renegotiating seven to eight times more loans than at the beginning of 2007, and modifications involving payment decreases outnumbered those involving payment increases, the paper said.
It remains to be seen how those most recent loan workouts and modifications perform. If "self-cure risk" and the risk of redefault make renegotiation less appealing to lenders than foreclosure, "the number of easily ‘preventable’ foreclosures may be far smaller than many commentators believe," the paper concluded.
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