Is the “Making Home Affordable loan modification program” working?

Worried about the slow pace to stem a flood of foreclosures, President Obama has called the nation’s mortgage industry on the carpet.

President Obama summoned mortgage executives to Washington in late July to answer for the sluggish pace of the government’s $75 billion program to prevent foreclosures.  In the three weeks since, the administration has been pressuring the nation’s mortgage servicers to speed up implementation of the Making Home Affordable loan modification program.  The program, begun in March, has only helped 235,250 out of four million struggling borrowers.

Forcing the issue, the Obama administration set a goal for the mortgage servicers to qualify at least 500,000 homeowners for 90-day trial modifications by Nov. 1.  Servicers already have 200,000 borrowers in trials to see if they can make three monthly payments on time, which is required before finalizing a modified loan under the administration’s program.  If the mortgage industry can accomplish Obama’s deadline, that would double in three months the number of trial modifications started in the first five months of the program.

The U.S. Treasury Department also began publicizing the performances of the nation’s mortgage servicers.  In its first report on Aug. 4, Bank of America had only begun loan modifications for 4 percent of its eligible loans, while Wells Fargo & Co. had only started on 9 percent of its loans! Perhaps the Washington threat of being publicly embarrassed each month could put a fire under the mortgage servicers’ feet.

“Today’s report from the U.S. Treasury further demonstrates that most mortgage loan servicers are not doing enough to live up to their commitments to help keep people in their homes.  What is it going to take to get these companies to change their behavior and take responsibility?” queried Ohio Attorney General Richard Cordray, who is suing one mortgage servicer on behalf of the citizens of Ohio.

Why is it taking so long to implement the Making Home Affordable Program?  Some say it is a complex program that is requiring mortgage servicers to implement system changes and hire and train new employees.  Now that it has begun, the pace should quicken.

“Despite negative press, most servicers are doing a good job of ramping up to handle the flow of modifications,” according to Terry Couto, a servicing consultant and founder of Newbold Advisors, Clearwater, Fla.

But a New York Times report on July 30 said that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Quoted in the article: “The rules by which servicers are reimbursed for expenses may provide a perverse incentive to foreclose rather than modify,” concluded a recent paper published by the Federal Reserve Bank of Boston.

According to a report on Mortgage Servicing News, lawmakers are outraged and are looking at other options, including allowing judges to modify mortgages on principal residences.

Joint Economic Committee chairman Carolyn Maloney, D-N.Y., said servicers need to speed up the pace of modifications.

“Servicers may be swamped, but families are literally drowning,” Rep. Maloney said at a committee hearing.