New plan to jump-start loan mods

With no end to the housing crisis in sight, the need to modify loan contracts to make payments more affordable is greater than ever. While the number of modifications is rising steadily, it is running far behind the need. In the first quarter of 2009, the loan servicers reporting to the government reduced the interest rate or loan balance on only 120,465 loans. This is an annual rate of about half a million, which is no more than one-fifth of what is needed.

Modifying a mortgage is not that big a deal. According to Joseph Smith of Default Mitigation Management LLC, who has been modifying loans on a small scale for several years, "After you get the borrower's complete package, it takes only about 45 minutes from beginning to end to modify a loan. This includes reviewing a budget with the borrower (20 minutes), determining surplus income (two minutes), completing the loan modification analysis worksheet (10 minutes), generating a special forbearance and mailing it out (10 minutes), and calling the borrower to report the result (three minutes). A few minutes more may be needed for additional calls, generating final modification documents and follow ups, so let's call it an hour, which is conservative."

Let's be even more conservative and assume two hours. JPMorgan Chase has announced that it now has 3,500 loan modification counselors. Using the two-hour assumption, these 3,500 workers on their own, ignoring the counselors employed by all other servicing firms, could modify 70,000 cases a week, and 3.5 million a year! Clearly there is an enormous gap between the productivity of servicers today and what is possible.

The reasons for the gap are well understood. Servicers over the years focused their system development on reducing the costs of dealing with borrowers who paid. Those with payment problems were few in number and could be handled by a relatively small staff. But as the number of problem cases has exploded, the servicers have been overwhelmed. Most have responded by substantially expanding their counseling staffs, but the systems needed for the staffs to work effectively have been lacking.

Smith notes that "while most loan servicers are trying to remedy the situation, progress has been slow. Most servicers have inadequate call routing for in-bound calls; have inadequate mail rooms, fax and image facilities; lack systems for tracking files; require excessive numbers of hand-offs in the decision process; and manage largely in a fire-fighting crisis mode."

The results are well known to the borrowers and their advisors who have tried to get their loans modified. It takes forever, and sometimes it is impossible to reach the counselor with whom they had their initial contact. They may have to begin again with someone else, who may not be able to find their file, and who may tell them a different story than the previous counselor.

If the borrower has not submitted all the proper forms, each one filled out correctly, the file is likely to be put aside, which the borrower may not know about unless he or she inquires and is lucky enough to speak to someone who knows. Files put aside often get lost, which means that the borrower has to submit the entire file again, without necessarily knowing what was wrong with the previous submission.

In some cases, a document submission gets lost in a chaotic fax room and is never logged in. When the borrower calls, no one she speaks to knows anything about her submission.

Delays are compounded by needless divisions of responsibilities, including analysts who check the math and negotiators who deal with the borrower. Smith notes that "if the analyst has a week of cases in his pipeline and the negotiator has the same, the borrower's total wait is two weeks, even if everything else goes smoothly." ...CONTINUED

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