Man, it is hard out there for a foreclosure plan. I had high hopes for the administration's plan to mitigate foreclosures by setting new standards for loan modifications and providing incentives for the financial sector to perform them, but the program is facing serious obstacles. That's not to bad mouth the efforts at Fannie Mae and Freddie Mac to provide affordable refinancing for certain borrowers, which are also under the MHA umbrella. But a variety of reporters, including myself, were able to badger the administration for real modification numbers last week and found that the administration's rather elegant plan has been seriously obstructed by the banks' lack of capacity and interest in modifying mortgage loans.
Why isn't MHA getting off the ground? About 50 percent of the initial problems seem to come from the challenge of trying to modify so many loans at once -- it's a lot of paperwork, and many servicers are still building capacity to handle the job. But Gretchen Morgenstern -- "the most important financial journalist of her generation" -- took a look at the underlying problem in her most recent column:
Lenders and their representatives, however, don't like to modify loans through interest rate cuts or principal reductions because, of course, it reduces the income they receive from borrowers. No surprise, then, that loan modifications have been a trickle amid the recent foreclosure flood.
Seriously. It's become clear that the administration has not put enough pressure on the banks to get loans modified, either through more restrictions on TARP banks or bankruptcy loan modification, perhaps the most effective tool for tipping the scales in favor of the borrower. Unfortunately, financial-sector lobbyists killed bankruptcy loan modification in the Senate a few months ago.
Where does that leave us, and in particular those folks on the brink of mortgage default? Last week, I asked a senior Treasury official when the time would come for the administration to look at these numbers and decide to take a new tack; he dodged the question and instead said that coming into the first 100 days of the program (servicers began signing up in April), the administration was remaining focused on improving implementation. I don't think we'll see a major change in the loan mod program until bureaucratic problems are eliminated, leaving bank reticence as the sole problem, or when more accurate statistics about the program are available in the coming months. Treasury has already adjusted the refi portion of the program to make more borrowers eligible, at least. But I doubt it's any coincidence that Morgenstern's column coincided with a Times editorial calling for the administration to focus on a different kind of loan modification, writing down the actual amount owed, in order to speed up the plan.
But arguments that loan modifications will ultimately save servicers money in the long-term will not be enough to get them to act in the public interest. Zubin Jelveh has a good handle on why that might be, though I think the paper he references likely overestimates redefault risk since so many loan modifications made prior to the administration's new standards were cosmetic efforts to continue squeezing customers rather than good-faith efforts to create a performing loan. Nonetheless, when persuasion fails, it's time for action. How about bringing that foreclosure moratorium back? Or letting foreclosed borrowers rent their homes for some period of time? Mark this well, though: There won't be much of an economic recovery if foreclosures continue at their current pace.
-- Tim Fernholz
