Foreclosure Buzz

When the American banking industry causes a global economic meltdown, how does the Obama administration respond? With more incentives and mere guidelines. Oh, and by the way, if you’re a loan servicer, the Obama administration will give you $75 billion if you’ll be its best friend. I’m speaking, of course, about the Homeowner Affordability and Stability Plan recently introduced by the Obama Administration. The plan falls short because it is basically another voluntary program driven only by bribes to a corrupt industry. It asks rather than demands. While the government demands changes to the auto industry, especially to the products, strategies and compensation of union workers, why hasn’t the government demanded more from the industry whose schemes caused the financial meltdown in the first place? Capping executive compensation of these financial giants is lipstick on a pig. Since the prior programs have thus far been horrible failures, it is unclear why Obama signed off on the sequel, but here goes:

The plan does not go far enough – not even close. The Plan has three major components, two of which are aimed primarily at loans held by Fannie and Freddie only. A third component is aimed at loan modifications to help at-risk homeowners. Loan modifications are necessary to keep borrowers in their homes, and the Obama plan seems to understand this point, but it aims to increase modifications through costly taxpayer funded incentives that will not impact this crisis significantly.

This component of the plan seeks to provide temporary reductions in monthly payments. If a lender brings a payment down to 38% of a borrower’s monthly income with a modification of the interest rate or extension of the maturity date, the government will pay to cause further reductions in payments until the ratio is reduced to 31%. The plan also provides that servicers (those that collect loan payments ) will receive $1,000 per year for up to three years for each modification that meets loan modification guidelines. It also provides additional payments to the holder of the mortgage for each modified loan (the payment being linked to declines in the home price index).

There are many reasons why loan servicers are not currently doing more modifications. In some cases, servicers find it more profitable to collect the fees that arise from default than to modify a loan; sometimes, their staff lacks the training and resources to handle the high volume of customers requesting modifications. In other cases, servicers are restricted by the agreements that they have with the holder of the loan from making meaningful modifications. The Obama plan only addresses cases in which the only reason the servicer is refusing to modify a loan is to maximize its profitability. By simply throwing more money at the problem, this plan does not address the full range of barriers to loan modification, and rewards servicers for the unconscionable behavior of giving precedence to the collection of fees over allowing viable loan modifications.

Home loans in many cases have been broken up into various components so that a combination of parties have diverse, and sometimes adverse, interests in the loan. This is not problematic when the borrower is able to make payments on time, but when a modification is appropriate, the system is impossible to navigate. The result has been a tidal wave of foreclosures that could have been prevented with affordable loan modifications. By failing to address the fractured nature of mortgage-backed securities, servicer complications and the conflicts and inefficiencies that arise from such a system, this plan will simply be a very costly band-aid on a shot-gun wound.

While the banks that hold or service these loans are central to the economic system that has created much of the wealth in America today, we cannot continue to defer to economists who tell us to dump money in to these entities because they are too big to fail. Today, trillions of dollars later, we are learning that these banks may actually be too feeble to self-sustain. It now appears, that the only way to repair the foreclosure crisis may be to impose accountability by implementing mandatory, uniform loan modifications.

On January 13, 2009 a group of consumer-friendly organizations signed off on a letter to members of the House Financial Services Committee, in which they called for loan modifications that meet the FDIC protocol. This protocol provides new loan terms that will return more to the investor than a foreclosure and which are affordable—and thus sustainable—for the homeowner. The authors of this letter advocated that no recipient of bailout funds should be allowed to foreclose on any principal residence unless the FDIC loan modification protocol does not produce a loan modification, or the homeowner has defaulted on such a loan modification.

Additionally, anecdotes from the rare “ethical lenders” also tell us that it is still possible to be profitable by providing fixed rate mortgages, on traditional 30-year terms, even, wait for it…, to those with sub-prime credit ratings. The Obama plan, conversely, merely proposes guidelines for modification, which lenders receiving Financial Stability Money (the new and improved “TARP”) would be required to implement, if they offer a modification. The substance of these guidelines has not yet been fully determined, but why waste time with these guidelines, when we have a model based on fixed-rate mortgages with 30-year terms that has worked for decades?

Offer borrowers loan modifications that meet the FDIC protocol. Get rid of complex schemes that led us to our current situation. Create a uniform, user-friendly system for modification of the loans, and finally, allow bankruptcy judges to reduce principal, where necessary. We have been convinced to believe that what is good for the economy is good for the taxpayer. To an extent this may be true, but as the taxpayer continues to bleed trillions of dollars to shore up a failing industry, it may be time to cut our losses, and try something new; something that will work.

Filed under: National Foreclosure News