Taking Servicers to the Woodshed - Loan Modification Advice

Reacting to the slow pace of loan modifications and quickening pace of foreclosures, Treasury Secretary Timothy Geithner and HUD’s Secretary Shaun Donovan are demanding a July 28th meeting in Washington D.C. with the 25 largest mortgage servicers to discuss exactly why the servicers aren’t modifying more loans. The 25 “invitees” all signed onto the Obama Administration’s incentive laden “Making Home Affordable plan after it was announced in late February.

The urgency of the meeting results from the escalating foreclosures and the devastatingly slow uptake of loan modifications under the guidelines of Making Home Affordable. In fact, when foreclosure filings for the year reached one million in May, experts were estimating 2.4 million for the year. Those estimates were recently revised upward to the tune of 3.5 million for the year based on the accelerating pace of filings during the second quarter.
 
“It’s not just California and Florida anymore,” said Mark Zandi of Moody’s economy.com in a recent interview. “Foreclosures are taking place coast to coast. They’re high-end homes, low-end homes, prime mortgages, jumbo loans, you name it. Foreclosure mitigation needs to be front and center.” Beside the slow loan modification uptake, another significant challenge is that 15 million homes were estimated be under water at the end of the first quarter. Preliminary estimates for the second quarter put that number at one home in five. Home that are significantly under water are much more likely to be left behind by their owners as they walk away from properties that have virtually no chance of getting back to price levels at the peak of the real estate bubble.
  
Ignored by the Bush Administration, the escalating foreclosure threat continued to build unchecked for almost two years before the Obama administration came to office riding on election promises of tackling the issue. Before the completion of his second month in office, the Making Home Affordable plan was announced with the objective of helping 4 to 5 million struggling homeowners to either modify or refinance mortgages with payments that had gotten out of reach due to job losses, increasing mortgage interest, or other factors. Four months after its initiation, the results have disappointed just about everyone attached to plan. Because of the slow start, the Treasury has been reluctant to publish any statistics regarding completed loan modifications but the recent release of preliminary data estimated that approximately 130,000 loan modifications had been originated in the form of trial modifications. Under the plan’s guidelines, modification applicants enter a three month trial prior to the final approval. Critics of the plan have consistently pointed out that the trial modification estimates fall way short of stemming the rising foreclosure tide and that the number of homeowners that fall out of the trial because of missed or late payments is still unknown but could be significant if prior post modification default statistics of greater than 50% hold true.
      
Another reason for the meeting is the reports of the struggles that homeowners are having in their discussions with servicers. An article in the New York Times recently covered the roadblocks that distressed homeowners encountered just trying to get a return call, which commonly took months.    “We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share,” wrote Mr. Geithner and Mr. Donovan in their letter.

A dissenting opinion has been expressed by William Kelvie, CEO of Overture Technologies which sells underwriting software. His take on the slow uptake takes aim at a critical structural element of loan modifications; underwriting. Mr. Kelvie summed it up saying, “Servicers are just not equipped to do this.” The basis for that statement comes from his assessment of the way servicers like Bank of America, Wells Fargo, and JPMorgan Chase have typically operated. Those operations were usually fairly straightforward including the processing of mortgage payments, property taxes, and handling borrowers that were in arrears. Borrowers in arrears usually amounted to 2 to 3% and were usually the most time intensive aspect of loan servicing due to the personal interface between the servicer and the borrower.  
 
Because home loan modifications and the borrowers’ circumstances surrounding them require specialized work, the personal interface between servicers and borrowers is even more labor intensive. The combination of labor intensive work and the sheer number of homeowners needing modifications has overwhelmed most of the servicers.  

The main structural issue, however, is that a newly modified loan must be underwritten again, a task made more difficult by growing unemployment and receding property values. Even if the servicers could hire and train enough staff to handle the incoming calls, the process would bottle-neck due to the lack of capable underwriters. The stern language of the demand for the July 28th meeting, however, doesn’t mention underwriting specifically but focuses on staffing saying, “…adding more staff than previous planned, expanding call centers beyond their current size, providing an escalation path for borrowers dissatisfied with the service they have received, bolstering training of representatives, developing extra online tools, and sending out additional mailings to borrowers who may be eligible for the program.”

It could be that the underwriting issue will be covered during the meeting but another issue is that servicers aren’t jumping to add staff and especially highly paid underwriting specialists for an activity that is putting losses on the books. One thing that is being promised is that servicers that aren’t meeting certain modification benchmarks will be publicized by the Treasury and/or HUD. If that’s all that comes from the meeting, it will be a very small consolation to homeowners trying to avoid losing their homes to imminent foreclosure.