Feds Move to Boost Mortgage Modifications: 5 Things to Know

Under pressure from the government, mortgage servicers are stepping up modification efforts.


Under mounting pressure from Uncle Sam, mortgage servicing firms got busy reducing homeowners' mortgage payments in August, starting nearly 125,000 new trial modifications in the month and bringing the total count to more than 360,000. The new modifications represent a 53 percent jump from the previous month's tally, according to a Treasury Department report released Wednesday. Overall, 12 percent of eligible borrowers received trial modifications in August, up from 9 percent in July. "They are making progress," says Mark Zandi, chief economist at Moody's Economy.com. "[But] there is a lot of work to do."

[See Obama's Loan Modification Plan: 7 Things You Need to Know.]

Mortgage modifications are a central plank in the Obama administration's sweeping effort to rescue the housing market—and the economy as a whole—from its most devastating slump in a generation. Under the terms of the housing rescue plan, unveiled in February, the federal government is offering financial incentives to persuade mortgage servicers to lower monthly mortgage payments for as many as 4 million Americans. Mortgage modification efforts have a checkered history of success, and the federal government hasn't attempted a modification effort on this scale since the Great Depression, Zandi says.

[Also see 6 Reasons Modified Loans Are Going Bad Again.]

Concerned by the program's sluggish start, federal officials ratcheted up pressure on servicers to get more aggressive in their mortgage modification efforts over the summer. In a July 9 letter to top executives at mortgage servicing firms, Treasury Secretary Timothy Geithner and Housing and Urban Development Secretary Shaun Donovan called on the companies to "to devote substantially more resources" to modifying mortgages. At a subsequent meeting later that month, servicers set a goal of starting 500,000 trial modifications by November 1. "We are on track to meet that goal," Assistant Secretary for Financial Institutions Michael Barr said Wednesday in written testimony before the House Financial Services Committee.

Despite these encouraging figures, Barr concedes that "much more remains to be done" to help borrowers modify their home loans. Since its inception, the modification program has been sharply criticized by homeowners for slow response times, misplaced paperwork, and the rejection of applications without explanations. In recent months, the federal government has taken several steps to address these concerns. Here is a look at five of them:

1. Expanding capacity: One reason that the modification efforts have been sluggish is that the mortgage servicing firms are simply overwhelmed by requests. To that end, treasury has asked servicers to beef up their resources. "This will require that servicers add more staff than previously planned, expand call center capacities, provide a process for borrowers to escalate servicer performance and decisions, bolster training of representatives, enhance on-line offerings, and send additional mailings to potentially eligible borrowers," Barr said in his written testimony.

[See Principal Write-downs Make for Better Loan Modifications—But Nobody Does it.]

2. Denial codes: Homeowners have also been frustrated by having their modification applications denied without apparent explanation. To address this problem, treasury is in the process of creating so-called "denial codes." Use of the codes will compel servicers to tell borrowers—and government officials—the reason they turned down their application. Such codes are expected to be in place by the beginning of October.

3. Tracking applications online: In addition, "we are working with servicers and Fannie Mae to streamline application documents and develop a Web portal, which can serve as a centralized point for modification applications and for borrowers to check the status of their applications," Barr said.

4. Additional servicer info: Last month, the Treasury Department began publishing monthly reports on individual servicers' efforts to rework mortgages. By placing companies' mortgage modification statistics side by side and making them public, the report aims to ramp up pressure on certain firms to get more aggressive in their modification efforts. In his testimony Wednesday, Barr said these monthly reports will soon include more metrics that will measure a servicer's performance in greater detail. "These performance metrics are likely to include such measures as average borrower wait time in response to inquiries, the quality of information provided to applicants, procedures for document processing and review, and response time for completed applications," Barr said. "We plan to include these metrics in our monthly public report."

5. "Second look": In order to prevent modification applications from slipping through the cracks, Freddie Mac began in early August a "second look" process, which will audit a number of denied applications. "In addition, the 'second look' program is examining servicer nonperforming loan (NPL) portfolios to identify eligible borrowers that should have been solicited for a modification but were not," Barr said.

Impact? Zandi says such efforts are a step in the right direction. "I don't know that any one of those things matters a whole lot, but together I think they matter," he said. "It makes the program work better, and that's to [the Treasury Department's] credit." But Zandi cautions that although 360,000 trial loan modifications represent a big increase from the previous month, the figure is dwarfed by the 2.5 million home loans currently in default or delinquency. Still, he says, if the federal government can modify 1.5 million to 2 million loans, "that will be enough to quell the crisis, I think."


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