The Treasury Department published its Home Affordable Modification Program Guidelines (“Program”), which the Obama Administration touts as providing the framework to modify millions of mortgages and keep Americans from losing their homes to foreclosure. The proposed Program will fail for the same reasons all large-scale mortgage modification plans fail. Loan modification is a relatively complex and time-consuming process. Most borrowers do not have the wherewithal, time, or resolve to work through the process. As a result, many homeowners who qualify for modification under the Program will not complete the modification process.
In addition, loan servicers lack trained personnel and technology needed to execute loan modifications on a large scale. Loan service companies collect payments from borrowers, distribute the money to the appropriate parties, and handle the foreclosure process for lenders. The skills and technology required to modify a mortgage are much different (and more complex) than those needed to service a loan.
The Program ends in four (4) years, which makes it unlikely loan servicers will spend large sums of money to hire and train personnel, purchase loan modification software, or incur other fixed costs necessary to enable a loan service company to perform large-scale modifications pursuant to the Program.
In addition, the loan service industry predicts reduced profits in coming years since (in part due to the current crisis) fewer people will qualify for mortgages. Accordingly, loan servicers are looking for ways to cut costs. Moreover, the Program provides loan servicers inadequate financial incentive to justify the costs associated with large-scale modifications. Likewise, the incentives the Program provides to the lenders are inadequate.
The Program guidelines require a loan servicer or lender that participates in the Program, to attempt to modify ALL loans that meet the Program’s criteria. In other words, if a lender or servicer modifies one loan under the Program, they must attempt to modify all loans that may meet Program guidelines. This too would be an expensive and cumbersome process.
Pursuant to the Program, borrowers in default or in danger of falling behind on their mortgage payments, pay none of the costs related to loan modification. In fact, the borrower receives payments from the government for each year they continue to pay their modified (reduced) mortgage. Accordingly, the lenders, servicers, and taxpayers bear the entire burden related to loan modifications.
The Program will fail to achieve large-scale loan modifications because homeowners, loan servicers, and lenders each have legitimate reasons not to participate in the Program. The good news is that if the Program fails (borrowers, loan servicers, and lenders do not participate) the taxpayers will not incur the $75 to $200 billion Program cost.
It appears the housing crisis will resolve itself the old-fashioned way. Delinquent borrowers will lose their houses through foreclosure. This will increase the housing inventory, which will cause housing prices to decline. At some point, prices will fall far enough for qualified borrowers to buy the houses.
© 2009, by John Butrus, All Rights Reserved
