Minimal modifications
One of the mysteries of the recession is why mortgage lenders haven’t tried harder to avert foreclosures. Because property values have plummeted in once-sizzling markets, lenders that repossess a house can lose half or more of the original loan’s value. That leaves plenty of room to modify the terms of a loan and still obtain a better return on the lender’s investment. Yet the number of loans going into foreclosure continues to mount, and the number of homes repossessed and sold this year is almost as high as it was a year ago.
The latest evidence arrived last week, when the Treasury Department reported that a new federal program for troubled borrowers had benefited only 9% of the eligible homeowners. The program cuts monthly payments to match the borrowers’ ability to repay, an approach that’s far less likely to result in new defaults than the payment plans typically offered by lenders. Yet some of the biggest mortgage servicing companies -- most notably Bank of America and Wells Fargo -- were slow to implement the new program, even though it offers cash to help borrowers stay current on their payments.
The banks said the Treasury Department overlooked their other efforts to help borrowers who were defaulting. Bank of America, for example, claimed to have made 150,000 loan modifications beyond the 28,000 tentative deals counted by the feds. Still, the total amounts to less than one-fourth of the bank’s borrowers who qualify for help. Many of them simply can’t be saved, such as the subprime borrowers who took on too much debt or the prime borrowers who have lost their jobs. But even excluding those groups, it’s hard to believe that Bank of America is doing enough loan modifications to maximize its returns. And the more homes it repossesses unnecessarily, the more it damages the value of neighboring properties -- sending a ripple of misery through the broader economy.
Granted, plenty of would-be home buyers have no interest in slowing the pace of foreclosures. There’s also the risk of creating perverse incentives when risk-takers are shielded from the consequences of their bad bets. The issue here, however, is whether the companies servicing mortgages are doing everything they can to protect the interests of those who own the loans. The numbers say they aren’t. Regulators should find out why, which means obtaining and disclosing more information from servicing companies about the mortgages that aren’t modified. The taxpayers who’ve lent the banks billions of dollars to rescue them from default deserve to know. But so do the investors and lenders whose interests the loan servicing companies are supposed to be protecting.
