Obama to alter mortgage modification effort
Reporting from Orange County and Washington -- In a renewed bid to stave off foreclosures, the Obama administration will propose measures Friday to give some jobless homeowners a three-month break on payments and give lenders more incentives to reduce the principal on delinquent loans.
The new measures come on top of a series of steps administration officials announced Thursday to fortify their $75-billion effort to modify mortgages and reduce foreclosures. To date, those efforts have focused on giving lenders cash incentives to ease payments by extending the payout period for loans.
The initiative to give jobless homeowners a reprieve on payments and to entice lenders to cut the principal was disclosed to a knowledgeable industry official, who did not want to be quoted publicly in advance of the plan’s unveiling.
“These program adjustments will better assist responsible homeowners who have been affected by the economic crisis through no fault of their own,” an Obama administration official said.
The new steps by the administration amount to an acknowledgment that the year-old program hasn’t done enough. By the end of December, it had permanently lowered monthly payments for only about 170,000 borrowers out of the expected 3 million to 4 million it was aimed at covering through 2012.
Even so, the program and separate efforts by banks and other lenders to rework overdue loans have pushed the rate of new foreclosures down 15.4% in the final three months last year, according to a federal report released Thursday.
But the report also sounded alarms about a potential looming tide of foreclosures. The number of borrowers who were 90 days or more past due on their mortgage payments, a key measure of future defaults, swelled 20.4% in the last quarter of 2009 over the previous quarter.
Worse, the modifications, while delaying the foreclosure process, did not appear to be a long-term solution: About 52% of those with modified loans defaulted again after nine months, said the report from the Office of the Comptroller of the Currency and the Office of Thrift Supervision, which have data on about two-thirds of the outstanding home loans.
The time bomb of delinquencies and repeat defaults have focused more attention on the administration’s Home Affordable Modification Program, which President Obama launched with great fanfare more than a year ago.
At a House hearing Thursday, frustrated Democrats and Republicans labeled the program a bust so far, echoing a stinging report this week by a government watchdog.
“This program is a failure and a waste of taxpayer dollars,” said Rep. Patrick T. McHenry (R-N.C.).
Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, warned the administration it needed to act quickly to fix the program. “I really do believe we can do a whole lot better than what we’re doing to keep people in their homes,” he said.
Assistant Treasury Secretary Herbert M. Allison admitted that modifying mortgages has been more difficult than officials had anticipated. “Certainly we’ve seen a lot of frustration with this program since its inception,” he told lawmakers. “We did not fully envision the challenges we would encounter.”
Among the changes to take effect June 1 is a prohibition on mortgage servicers starting or continuing foreclosure proceedings on a borrower who enters the Home Affordable Modification Program.
Companies servicing mortgages also must screen borrowers who have missed two or more payments to determine whether they are eligible. If so, the servicer must “proactively” solicit them to participate.
In addition, Allison said, the administration was preparing to move forward with an initiative to modify second mortgages after Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo & Co. agreed to participate.
That initiative would be part of a greater administration push to have lenders reduce the amount of principal owed on delinquent loans, an action analysts said is a key to limiting foreclosures.
Administration officials Friday will announce greater incentives for servicers to write down mortgage principal as well as to allow jobless homeowners in the program to skip, at least for now, three months of payments, according to an industry executive who requested anonymity because the changes had not been made public.
“Principal reduction is probably the last remaining significant vital step that needs to be taken in loan modifications . . . to make those modifications stick,” said Stuart A. Gabriel, director of the Ziman Center for Real Estate at UCLA.
Many analysts believe the problem of negative equity -- about a quarter of U.S. homeowners with mortgages owe more than their homes are worth -- will make it difficult for modifications to succeed because even a slight economic setback could cause those borrowers to abandon their loans and homes.
First American CoreLogic, a Santa Ana research firm, estimated Thursday that the typical homeowner who is underwater won’t see the home’s value rise above the loan amount at least until late 2015.
Trying to address that issue, Bank of America said Wednesday that it would offer to reduce $3 billion in principal over a five-year period for certain borrowers with adjustable rate mortgages from Countrywide Financial Corp. The bank said it hoped its effort would serve as a model for other mortgage servicers.
Such efforts may be too little, too late, said analysts at Institutional Risk Analytics in Torrance, who said the latest refinements of the government’s anti-foreclosure efforts show little prospect of success.
“This is a ‘kick the can down the road’ action at best,” said Institutional Risk Chief Executive Dennis Santiago. “Yes, it will keep people in their homes longer. However, there remain no provisions for relief of the debt.”
The Home Affordable Modification Program, which was launched last spring, got off to a slow start. By the end of February, just 168,708 mortgages had been permanently modified.
Allison said more than 1 million three-month trial modifications had been started, but conversion to permanently reduced payments has been difficult amid complaints from homeowners about delays, lost paperwork and bureaucratic runarounds by lenders.