Report Shows Flaws in Loan Modification Program

Washington, DC, Dec. 11, 2009--A new report says there are few incentives for mortgage lenders to offer loan modifications to stop the foreclosure crisis.

The National Center for Consumer Law's report, “Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior,” revealed servicers, unlike investors or homeowners, generally don't risk losing money on foreclosures.

In fact, mortgage servicers usually make money on foreclosures.

Report author Diane E. Thompson, an attorney with the center, said, “The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were at best only marginally affordable when made.”

The report said that one solution to the foreclosure crisis is to modify the loan terms in more cases.

The Treasury released its plans to help homeowners Nov. 30. Part of the new program is to help borrowers who are currently in the trial phase of modified mortgages under the Obama administration's Home Affordable Modification Program (HAMP).

The modification program, according to the Treasury, has helped over 650,000 borrowers.

Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year.

“We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners,” said the new chief of Treasury's Homeownership Preservation Office Phyllis Caldwell. “We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones.”

The Center for Responsible Lending said that Without mandatory requirements and fully disclosed results, foreclosure prevention efforts—no matter how well-intentioned—will not succeed.

The two lending advocacy groups recommend that Congress:

•Require loan companies to stop foreclosure proceedings while loan modifications are under consideration.

•Require loan companies to work with homeowners in distress.

•Mandate loan modifications before a foreclosure.

•Provide for principal reductions on existing loans in the administration's Home Affordable Modification Program and through bankruptcy reform.

•Increase automated and standardized loan modifications for borrowers in default and provide a safety net for borrowers for whom a standardized modification is not affordable or who later default, through no fault of their own, on a loan modification.

•Create a low-cost, short-term loan program for unemployed homeowners who have no other option for keeping current on their mortgage.

•And allow stressed homeowners the option of lowering their principal mortgage balance, including through bankruptcy courts.