Over the course of President Barack Obama’s first year in office, one of the priorities of his administration has been to stabilize the residential housing market. And there have been some signs of success, such as home prices finally touching bottom in a number of cities across the country.
Despite these salubrious data points, it’s fairly obvious the residential sector remains troubled, as foreclosures and defaults continue to sweep across the nation. In short, more and more homeowners are still losing their homes.
The intransigence of the foreclosure and default problems has so far defied the best efforts of lenders to work their way out of the mess. All this becomes obvious when we look at recent statistics from the government’s own Home Affordable Modification Program (HAMP).
As of January, more than 900,000 homeowners were in "temporary" trial loan modification plans, but mortgage servicers had managed to convert only about 63,000, or 7 percent, of the temporary modifications to permanent modifications, reported the Treasury Department.
(While mortgage servicers may or may not be the originator of your loan, they are the companies responsible for the ongoing management of your existing mortgage by collecting loan payments, crediting your account, handling escrow, etc. If you are behind on your mortgage, the firm you are dealing with is the servicer.)
With this in mind, the government took another shot at fixing the problems with HAMP, introducing at the end of January new guidelines aimed at streamlining requirements.
The guidelines now specify what documents borrowers must provide to loan servicers and that servicers must collect the documents before starting borrowers on three-month trial modifications.
"Not only do we have a multitude of individuals applying for loan modifications, but every lender seemed to have its own documentation standard and guidelines," observes Sylvia Alayon, vice president of operations for the Consumer Mortgage Audit Center in Fort Lauderdale, Fla. "What the government has done is wrapped some rules around documentation standards and added a timeline."
Will all this save HAMP?
The problem is not with HAMP, itself, says Alan White, industry-watcher and assistant professor at Valparaiso University School of Law in Valparaiso, Ind., it’s that the servicers aren’t doing a good job.
Given that the industry voluntarily modified to permanent status more than 100,000 mortgages per month just before HAMP was announced, these results are miserable, White emphasizes. "There are salvageable mortgages getting lost because the servicers can’t seem to do the job right."
So, what seems to be the problem with the mortgage servicers, most of which are banks?
As White sees the situation, over the past two to three years a lot of mortgage servicing got consolidated into four big banks (BofA, Citicorp, JP Morgan Chase and Wells Fargo), all of which were not traditionally large subprime servicers. …CONTINUED
The major banks are accustomed to dealing with a portfolio that might have a half-of-a-percent in default at any one time, which is usually handled by sending out bills and collecting payments. The banks are not accustomed to dealing with double-digit default rates and they just can’t seem to get on the right track.
The servicers also may not have been able to get enough warm bodies into play fast enough. Once new staff is hired, it takes four to seven weeks for them to go through training. And let’s face it, these newbies are certainly not going to be immediate experts.
To back up his contentious contention, White looked at the government statistics in regard to servicer conversions from trial mods to permanent mods, and the data show the major banks converting just a small percentage of their loans.
At the end of 2009, the best of the "Big Four" was Wells Fargo, which converted over a three-month period 11 percent, then in descending order came Citicorp with 4 percent, JP Morgan Chase at 1 percent, and BofA at less than 1 percent.
Over the same period of time, the troubled GMAC Mortgage managed to convert 41 percent of its loans, and smaller players like Residential Credit Solutions and Ocwen converted 88 percent and 77 percent, respectively.
The government was not without some blame on this. There were two ways to approach the loan modification situation through HAMP, and the government strongly promoted the least efficient methodology.
Homeowners could enter a trial modification with their mortgage servicer after a verbal interview. Supporting documents were submitted afterward. The more stringent approach was to allow a homeowner to enter a trial modification only after first supplying all the necessary documentation.
The first option — putting homeowners in a trial modification after a verbal discussion — resulted in a high percentage of "possibles" entering the program, but a low percentage of transfers to permanent modification. Going the other route meant a low percentage of possibles entered trial mods, but a high percentage of those in trial mods transferred to permanent status.
The problem with the first approach — getting people quickly into trial mods after verbals — was that it created a tremendous amount of extra work for the servicers, because they literally had to harass the homeowners to send along the necessary documentation and complete the process.
Indeed, this became a real sticking point. Mortgage servicers have been extremely frustrated by borrowers not completing the modification requirements.
So, why did the servicers opt for this approach?
The Treasury Department issued a monthly Servicer Performance Report that indicated how a servicer’s performance under the HAMP program compared to others. One important statistic was the percentage of modifications, including trial mods, a servicer had established compared to that servicer’s eligible group.
Establishing the trial mod based on verbals allowed it to be counted immediately in the servicer’s performance, and therefore it looked good to the Treasury Department.
"The servicers would take this information verbally and there wasn’t any verification," says Alayon. "You were placed in this trial period and what the lenders were saying was they weren’t getting cooperation from the homeowners — they weren’t supplying the documentation."
The recent HAMP changes were meant to address this fundamental problem, among others.
"The changes are a step in the right direction," says Alayon. "Now it is going to require lenders to get the requirements up front instead of waiting at the end of the trial period to begin the process."
Steve Bergsman is a freelance writer in Arizona and author of several books, including "After the Fall: Opportunities and Strategies for Real Estate Investing in the Coming Decade."
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