Loan modifications get bad reviews

Federal programs aimed at modifying loans to stem foreclosures aren’t working, witnesses told a Senate Judiciary subcommittee, and some lawmakers called on Congress again to pass a bill allowing bankruptcy judges to modify home loans -- a procedure known as mortgage cram-downs.

Separately, the Federal Reserve took steps to make lending terms more understandable as part of its efforts to avoid another mortgage meltdown, which triggered the deep recession worldwide.

Although economic data continue to point to the recession easing later this year, rising unemployment and the prospect of a new round of foreclosures are worrying many that a recovery could stall.

“It is clear to me that Congress must do more to help struggling American homeowners,” said Sen. Sheldon Whitehouse (D-R.I.), a proponent of the mortgage cram-down bill. “If we fail to act, I fear that we put ourselves at risk -- that a vicious cycle of foreclosures, falling home values and declining tax revenues will keep us in recession for years to come.”


Whitehouse, who chairs a Senate Judiciary subcommittee reviewing the measure, called on the Senate to take “another serious look” at cram-down legislation as one of his constituents testified about an inability to modify two mortgages.

The financial services industry and many Republicans in Congress have strongly opposed such a move and helped stall the legislation in the Senate this spring after the House passed the measure.

Cram-downs would give bankruptcy judges authority to reduce the loan amounts owed as a way to enable people to pay their debts and stay in their homes. The proposal has been one of the key alternatives to loan modifications.

The Fed, meantime, proposed new disclosure rules Thursday that would highlight risky features of mortgages and home equity loans, such as adjustable rates and prepayment penalties, along with rules to prohibit mortgage brokers and loan officers from getting paid more for steering people into higher cost loans.

“Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances,” Fed Chairman Ben S. Bernanke said.

The rules probably won’t take effect until at least next year as the Fed opened a 120-day period for the public to comment on the proposal. The Fed will have to sift through an expected flood of responses before passing final regulations, which probably will give lenders time to prepare for the new rules.

Industry groups said they were analyzing the details and wanted to be sure that new guidelines don’t cause more confusion for consumers.

“The objective of the final rule should be to both clarify and simplify,” said Robert R. Davis, executive vice president for mortgage markets and financial management at the American Bankers Assn.


The Fed’s efforts come as the Obama administration is still struggling to find ways to stop the tide of home foreclosures.

The Hope for Homeowners program, enacted last fall, is being reworked after it resulted in only one mortgage modification. The Home Affordable Modification Program, launched this spring with $50 billion in financial bailout money, has offered 325,000 modifications to homeowners in conjunction with mortgage servicers, according to the Treasury Department. About 160,000 of those are in a trial phase to see if the terms work for the homeowners.

But this month Treasury Secretary Timothy F. Geithner and Housing and Urban Development Secretary Shaun Donovan wrote to the heads of 25 large lenders participating in the program to tell them they needed “to devote substantially more resources to the program.”

A private initiative called Hope Now -- launched in 2007 by a consortium including mortgage companies, trade associations and community organizations -- said it had modified about 4 million mortgages.


That hasn’t been enough. Foreclosure filings nationwide were up more than 33% last month compared with June 2008, and more than 1.5 million homes were the subject of foreclosure filings in the first six months of the year, according to RealtyTrac.

“The foreclosures are growing far faster than our voluntary programs,” said Sen. Richard J. Durbin (D-Ill.). “We’re falling farther and farther behind.”

Durbin, the main Senate proponent of cram-downs, said the threat of bankruptcy could motivate lenders to modify more mortgages. He has been looking for an opportunity to revive the legislation.

The financial services industry said such a law could backfire on consumers by making companies less willing to lend.


“It would inject greater risk into borrowing for a home, and that risk would translate into higher cost of buying a home,” said Scott Talbott, chief lobbyist for the Financial Services Roundtable, which represents large financial institutions.