Loan Mods Slow as Foreclosures Rise

With the hundreds of billions of taxpayer dollars that have been poured into the banks in recent months, it seems reasonable to ask whether the money is being used for the intended purposes. One of the big objectives of the Obama Administration has been to encourage the banks to modify loans for homeowners in financial distress. The administration’s loan modification plans of “Making Home Affordable” were announced with much ado in February 2009. News reports and persistent feedback from struggling homeowners indicates that the loan modification goals are going unfulfilled. Foreclosures are proceeding at a rapid pace, and San Diego foreclosures are at record high levels. To this point the “Making Home Affordable” program has been much ado about nothing.

The Wall Street journal reported on July 28 that 25 mortgage servicing companies have been summoned to Washington this week to discuss their loan modification efforts, and whether loan modifications are proceeding as intended. The banks will be facing serious criticism for the delays and lack of progress in modifying loans for delinquent and at-risk borrowers. Despite the millions of home owners across the country who are either in default for late payments or actually in foreclosure, so far only 200,000 borrowers have received “trial modifications” of their mortgages. These trial modifications are supposed to be a first step toward permanent loan modification. The Obama Administration hopes that as many as four million people will eventually receive loan modifications, so the progress so far is only nominal.

Early responses from the banks suggest two major problems. First, there is no homogenous policy in place to determine who qualifies for loan modifications. Some banks are willing to modify loans for “at risk” borrowers, loosely defined as a borrower in “imminent default” but not yet in actual default on their mortgage payments. Other banks require that borrowers actually default on their mortgages before they will consider loam modification applications. This leads to the paradox which requires that conscientious borrowers who are seeking to do the ‘right thing’ actually do what most would consider the ‘wrong thing’ in order to have a good-faith discussion about loan modification options with their bank. Many banks are actually advising borrowers to stop paying on their loans so that they can help them find a way to pay for their loans!

The second big problem is that even the banks that are cooperating with loan modification efforts are moving far too slowly to accomplish the objective. It is not unusual for a loan modification request to take six months or longer. During that time (as mentioned above), many homeowners have reluctantly or willingly stopped making their mortgage payments. During that time the loan balances and late fees can accumulate create even larger loan balances which need to be reworked. The banks have failed to staff properly, and this failure is raising the costs to delinquent borrowers. It could wind up costing the banks and their shareholders more too. Consider a situation where a borrower asks for modification but is advised to default before a loan modification application will be accepted. If the modification fails, the bank has foregone the opportunity to collect mortgage payments during the time that it took the bank to process the loan modification application.

Some banks are only now starting to implement their loan modification programs on a large scale. Bank of America waited until July before offering a loan modification program for all at-risk borrowers. The BofA plan requires that the borrower scale back to partial mortgage payment for several months before a loan modification will be considered. This is one step better than requiring borrowers to default, but still difficult to understand from the perspective of a BofA shareholder.

Wells Fargo waited until June before implementing its loan modification program for at-risk borrowers. By that time the number of “at risk” borrowers who had applied for loan modifications with Wells Fargo had grown to 40% of the total number of applications. This was up from 10% of the total number of Wells Fargo loan modification applications in December 2008. According to a Wells spokesperson, Wells Fargo and other loan servicers had been waiting for final federal guidelines that more clearly define the cases where loan modification should be pursued instead of foreclosure.

Left to their own definitions, most mortgage servicers are defining an “at risk” borrower as someone who has total cash savings or other liquid assets worth less than three times a single-month’s mortgage payment, and no more than a few hundred dollars left at the end of each month after expenses. So, in other words, if a family has a $2,000 mortgage payment and monthly household expenses of $2,000, then their monthly income could be no more than $4,300, and their liquid savings no more than $6,000. In this author’s opinion, it is hard to see how this hypothetical person would not already be in default on their mortgage. An unexpected job layoff, an accident, or one major medical bill would leave the “at risk” borrower a homeless beggar in just over one month’s time.

Hopefully the Obama Administration will quickly come up with final guidelines for the “Making Home Affordable” program. The banks have received large sums of money at low interest rates, and the banks should now make a good faith effort to pass along low interest loans to families who are in financial distress. I’ll continue to advocate for financially distressed owners of homes in San Diego CA. Loan modifications are a far better alternative to foreclosures for struggling home owners, for tax payers, and for the banks themselves.