Foreclosures: Why Obama's New Loan Modification Plan Raises More Questions Than It Answers
The Obama administration's latest plan to help homeowners lower their mortgage payments seems like a step in the right direction in fighting foreclosures, at least compared with the government's feeble efforts to date. According to the WSJ:
Terms of the administration's proposal include a commitment from mortgage servicers to reduce the loan balances of troubled borrowers who owe more than their homes are worth, people familiar with the matter said....But before we look further at the few available details on the plan, which remains sketchy, a little context is helpful. That's because the major obstacle to offering loan modifications to eligible borrowers isn't technical, or even financial, but rather political. There's no mystery about why banks and loans servicers have modified so few mortgages -- they don't want to. The solution is equally straightforward -- make them.Banks would also have to reduce second-lien mortgages when first mortgages are modified.
Feds: Doing back-bends for the banks
Problem is, the White House has practically dislocated a hip not making financial firms offer mortgage relief to people who, with a little help, would have a good chance of keeping their homes. For instance, participation in the Treasury Department's main anti-foreclosure initiative, the Home Affordable Modification Program, is voluntary, and HAMP itself effectively leaves it up to loan servicers to decide if they wish to work with homeowners in good faith. Because such firms lose less (or make) more money on foreclosures, they not surprisingly resist altering mortgages.
As a result, since HAMP was launched in 2009, banks and servicers have routinely flouted the program's rules. Why? Because beyond being in their financial interests to do so, the Obama administration lets them. It doesn't fine or otherwise penalize financial firms that refuse to cooperate. And there is no written policy for handling HAMP violations. In fact, Treasury's official stance is that it lacks the authority to punish companies that fail to comply with the program.
Meanwhile, financial firms aren't just breaking HAMP rules -- they're breaking the law. Office of the Comptroller of the Currency chief John Walsh told Congress earlier this month that banks and servicers have violated state and local laws, regulations or rules in how they handle foreclosures. That has had "an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole," he said.
The government has also opposed more assertive -- and effective -- ways of combating foreclosures, such as legislation that would empower bankruptcy court judges to cut a homeowners's mortgage principal. And more recently, Treasury Secretary Tim Geithner and other White House officials have advocated keeping foreclosures rolling, even as evidence of widespread "robo-signing" proved that banks and servicers were committing willful, systematic fraud.
White House: Is it serious this time?
So the first question in judging the administration's new modification plan is this: Is it serious? For now, it's hard to tell. Certainly, I'm encouraged that the government is finally looking to compel servicers to reduce loan balances, rather than simply trimming the interest rate or extending loans. Alys Cohen, a staff attorney with the National Consumer Law Center in Washington, told me that cutting balances and second mortgages would constitute significant reform.
"Principal reduction and second liens have had no meaningful progress until now, and if meaningful progress can be made that would be a huge step forward," she said.
But much hinges on what this "commitment" from servicers actually means. Will it amount to nothing more than a promise, or will it be governed by the force of law? If it's the latter, what federal or state agencies will enforce the law, and how will servicers be punished for breaking it? More important, who will determine if a homeowner qualifies for modification, and how will that be determined? Will any rules stipulate by how much banks will have to cut loan balances?
The WSJ also reports that the new plan "would allow banks to devise their own modifications or use existing government programs." Since existing government programs like HAMP are unlikely to work barring a major overhaul, that aspect of the proposal may not be particularly significant. Meanwhile, one of the reasons foreclosures are soaring is precisely because banks have been allowed to devise their own modifications, which tend to be far less effective in keeping borrowers in their homes than mods performed under HAMP.
Someone has to hold banks accountable
So a related question is whether an independent third party will be allowed to examine if servicers aren't meeting their commitment to make loans affordable. Similarly, will the plan provide for some sort of mediation for borrowers who are rejected for modification?
As part of the government's new approach, banks also could have to contribute "more than $20 billion" to fund loan modifications. OK, how much more? It better be a lot because $20 billion seems like a pittance given the number of homeowners who need help and who may have been wrongly been denied a modification in the past.
One encouraging sign is that the government appears ready to make banks, rather than investors, take the financial hit of writing down the value of modified loans. That would be good in the sense that banks could no longer claim their hands were tied by their securitization agreements with investors.
But investors in mortgage-backed securities aren't the reason why financial firms resist lowering mortgages. Very few of the so-called pooling and service agreements between servicers and investors restrict loan modifications. That's on the banks and servicers. It's also fair to ask how protecting investors from losses would discourage them from making similarly risky investments the next time housing prices start bubbling.
The biggest question of all, Cohen notes, centers on what the feds must do to make servicers change their loan modification practices. And here politics, and the priorities they reflect, raises its ugly ahead again. Because the bottom line is this: If the government really means business, it will have to switch gears from insulating the financial industry from the pain of writing down millions of mortgages to focusing on giving ailing homeowners the help they so badly need.
Thumbnail from Wikimedia Commons, CC 2.0; Obama photo from WhiteHouse.org
Related:
- Foreclosure Express: Why the Feds Let Banks Get Away With Murder
- How to Spin a Failing Program as a Success: The Treasury and HAMP
- Time for Obama to Admit We Need New Ideas for Halting Foreclosures
- Banks Are Stealing Homes: Why Won't Obama Stop It?
- What Farmers Can Teach Homeowners About Avoiding Foreclosure