2009's mortgage modifications pretty minor
Wednesday, December 23, 2009
This was supposed to be the year of loan modifications.
With great fanfare early in the year, the Obama administration unrolled a plan to spur banks to help troubled homeowners avert foreclosure by reducing their monthly payments.
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But at year end, the plan is widely considered a bust.
Borrowers complain of months of begging and endless phone-tree loops. Banks complain of borrowers who don't submit documentation and don't return calls.
The net results have been paltry: Just 31,382 borrowers nationwide had received permanent loan mods as of Nov. 30 under the Home Affordable Modification Program (HAMP), the Treasury Department reported. Meanwhile, First American CoreLogic says that 1.7 million homes are likely to be lost to foreclosure next year.
"HAMP is turning out to be something of a disaster," said Lisa Sitkin, an attorney at Housing & Economic Rights Advocates in Oakland, who works with many struggling borrowers. "There are delays and lost steps at every turn. The bureaucratic requirements are endlessly frustrating."
Richard Leong of Daly City is a case in point. He and wife Rachel Lim have owned their Daly City home since 2000. But after he lost his biotech job, they fell behind on payments. He contacted the loan servicer, JPMorgan Chase, a year ago to request a loan modification, and says he calls the bank at least once a week.
"I've been calling them so many times; each person gave me different answers," he said. "All my savings and 401(k) are gone; right now I'm totally drained of money."
Chase confirmed that Leong has been trying to get a loan modification since November 2008, but said it was stymied because there was no household income.
"Under HAMP, there needs to be some type of income to qualify for a modification," said Chase spokesman Gary Kishner. "If there is no income, there is no way to sustain anything."
Lim eventually got a job in Sacramento, but Kishner said Chase still hasn't received proof of the income.
Stalemates common
That kind of stalemate appears to be typical - along with the increasing prevalence of mortgage problems due to unemployment.
So what's the answer? Here are some ideas that various stakeholders and observers have suggested.
-- Options for unemployed borrowers. Foreclosures aren't just about subprime loans anymore. This year, many borrowers with prime loans fell behind because of job loss.
"The second wave of foreclosures is related to the terrible unemployment figures," said the Rev. Lucy Kolin, a pastor at Oakland's Resurrection Lutheran Church. She's part of an interfaith coalition called the PICO National Network that went to Washington this month to urge legislators to address this group. "There is no program set up to deal with homeowners who are unemployed."
PICO suggests expanding HAMP with an approach to specifically address unemployed homeowners, modeled on a Pennsylvania plan called Homeowners Emergency Mortgage Assistance.
"It would get the homeowners payment down to 31 percent of the monthly income for two or three years or until they regain employment," she said. "It would not be a grant, but a loan. Treasury would pay the servicer at the end of 24 or 36 months for the lost payments; that amount would become a loan to the homeowners." For people with no income, payments would be suspended.
-- Principal write-downs. More than a quarter of mortgage holders owe more than their home is worth. Even if those people get loan modifications, they're stuck paying off homes that could be underwater for years. That's why many consumer advocates think banks should be compelled to reduce the amount of debt owed on underwater homes. A provision to let Bankruptcy Court judges do just that seems unlikely to pass Congress, after several failures.
"You want homeowners to be in a position where they can start to build equity and wealth," said Paul Leonard, director of the California office at the Center for Responsible Lending in Oakland. "The problem with affordability-only modification is that it essentially makes homeowners renters for the foreseeable future and locks them into their homes so they can't move elsewhere for better jobs."
He suggests working out a way to make principal reductions part of the existing program, triggered only for properties that have experienced a certain level of price decline.
-- Rent back foreclosed homes. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggest giving former homeowners the right to rent their home after foreclosure. This year, Fannie Mae started offering the rent-back option to people who sign over their homes as a deed in lieu of foreclosure, which is less harmful to a borrower's credit.
Incentive to deal
Baker sees the approach as a big stick to motivate lenders to play let's make a deal.
"If you give people the right to rent, it changes the logic from the lender's standpoint and makes foreclosure less attractive," he said. "Many lenders of their own volition will decide to work on loan modifications - otherwise they could be stuck with a renter for five to 10 years. It would shift the balance of power hugely in favor of the homeowner."
-- More government pressure. Loan mods are voluntary. Banks get incentive payments for completing them, but it's ultimately up to them whether a foreclosure will be cheaper. Starting this month, the Treasury Department is sending three-person "SWAT teams" to the eight largest loan servicers to keep tabs on how they're handling loan mods. The banks will have to submit progress reports two times a day. And Treasury will publish lists of lenders that are falling short.
-- More industry involvement. Christopher George, president of CMG Mortgage in San Ramon, says that trade groups, such as the California Mortgage Bankers Association, where he is the secretary, could get together to pitch in.
"My recommendation is to harness the power of members in those organizations, ask them to participate on a pro bono basis to help consumers navigate the process," he said. "You know how confusing and complicated the whole process can be."
He suggests the trade groups collaborate on a guide for troubled homeowner and perhaps hold regional modification fairs, with lenders, lawyers and financial advisers.
-- Do nothing. There's plenty of grassroots support for an idea that could be expressed as "you made your bed, now lie in it." Patrick Killelea, a Menlo Park programmer who maintains the popular Patrick.net blog, explains the rationale.
"These were all grown-ups getting themselves voluntarily into debt with the false expectation that prices would rise forever," he said. "They did a lot of harm, because prices were driven up, so people, especially families with young children ... would have to take on unreasonable debt because of bad decisions that other people made."
Letting homes go into foreclosure would allow the market to recover much more quickly, he said. "It would drive prices down and it would be quicker," Killelea said. "It's like peeling a Band-Aid slowly versus ripping it off."
Rather than prolong the agony, "Just yank the whole thing off."
E-mail Carolyn Said at csaid@sfchronicle.com.
This article appeared on page DC - 1 of the San Francisco Chronicle
Read more: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/22/BU041B6FAO.DTL&tsp=1#ixzz0aVzy81PV
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