Workouts Just Not Working Out

Industry measures to keep people in their homes are falling short, group says.

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Rather than embrace a full-on, taxpayer-funded bailout, the Bush administration has preferred to address the housing crisis by encouraging lenders to get together with struggling borrowers to find arrangements—perhaps by modifying loan terms—to enable homeowners to avoid default.

These negotiations, known as loan workouts, are not formally associated with Richard Simmons—not yet, anyway. And although they provide an opportunity for struggling borrowers to stay in their homes, the process can be slow, since lenders have to go through one loan at a time. (And with the scope of the crisis building, the number of struggling borrowers is staggering.)

So how are the workouts working out? Well...

"The collective efforts of servicers [those who collect loan payments] and government officials to date have not translated into meaningful improvement in foreclosure prevention outcomes," a group of state attorneys general and banking regulators known as the State Foreclosure Prevention Working Group said in an April 22 report. "In major respects, the subprime servicing data for January 2008 is nearly unchanged from October 2007."

The report includes several findings that suggest the workout efforts are failing, such as:

Seven out of ten seriously delinquent borrowers are still not on track for any loss-mitigation outcome. The number of borrowers in loss mitigation has increased, but it has been matched by an increasing level of delinquent loans; thus, the relative percentage has remained about the same. "Given creative servicer outreach efforts and increased public awareness of the HOPE Hotline during this time period [Oct.-Jan.], this large gap suggests a more systemic failure of servicer capacity to work out loans," the report said.

Data suggests that servicers' loss-mitigation departments are severely strained in managing the current workload. The report noted that almost two-thirds of all loss-mitigation efforts started are not completed in the following month. "We are concerned that servicers overall are not able to manage the sheer numbers of delinquent loans," the report said.

So what does this mean? Well, it's great fodder for anyone advocating for the government to take on a greater role in the housing crisis. The argument is pretty straightforward: "Your industry led, loan workout plan isn't working; it's time to get the government involved."

With momentum already building for the government to take on a larger role in the crisis, bailout advocates will be laminating this report and using it for a key chain.