Mortgage Modifications Can't Catch Foreclosures

With unemployment projected to continue rising, leaving more homeowners without jobs and unable to meet their mortgage payments, Congress can expect an earful from constituents about what it's doing to stem the tide of foreclosures.

Against this backdrop, the Obama Administration on Aug. 4 unveiled an optimistic report on its signature foreclosure initiative: Mortgage companies have offered to adjust more than 406,500 loans under the Making Home Affordable program, and have actually modified more than 235,000. The Treasury Dept. lauded the program's "rapid progress," saying that it "puts the program on track to offer" modifications to 3 million to 4 million homeowners over the next few years, encouraging news for homeowners seeking to keep a roof over their heads.

That's an impressive start for a months-old program, if not the dramatic success many would have liked, analysts said. "The numbers are really good," says Jaret Seiberg, a policy analyst for Concept Capital's Washington Research Group. "This is a classic instance where reality and perception collide in Washington and disappoint everyone."

Some Shortcoming Acknowledged Although the program has made fast progress, the mortgage modifications are dwarfed by the 1.8 million foreclosures already tallied in the first half of this year by Equifax (EFX) and Moody's, and by projections for 3 million to 4 million foreclosures over two years. Not exactly good news for lawmakers to bring home to voters during a summer recess.

John Taylor, head of the National Community Reinvestment Coalition, a network of housing advocacy groups, said that while he's encouraged to see the modifications, he isn't convinced it will make much difference in the economy. "To the extent that people are hoping it will eradicate contributions to the recession [from foreclosures], we've got to see more significant numbers," Taylor says. Dan Clifton, a Washington policy analyst for Strategas Research, says loan modifications to date are "on a scale that's way too small to impact home prices."

Treasury acknowledged some shortcomings in its program—among servicers, there has been "uneven ramp-up and substantial variation in the pace of modifications," the agency said. The numbers show that a half-dozen servicers have modified between 19% and 25% of the mortgages they handle, while many others have modified just 6% or less. Some banks that accepted TARP funds—Wells Fargo (WFC), Bank of America (BAC), and Wachovia among them—fall into the latter category.

Calling for Legislative Measures Industry officials cautioned against blaming individual companies just yet. "It's probably too early to say who are the good guys and who are the bad guys," says Paul Leonard, an official with the Housing Policy Council and a lobbyist for the Financial Services Roundtable, which represents large financial firms. That's because, as the Administration built its new program, servicers had to hire staff and craft procedures to deal with modifications, which some accomplished faster than others. "You're looking at large institutions that don't turn on a dime," says Andrew Jakabovics, associate director for housing and economics at the Center for American Progress, a Democratic-leaning think tank.

But industry critics have little patience for that kind of reasoning. In a blistering statement, the Center for Responsible Lending, a consumer advocacy group, dubbed the Administration's list of mortgage companies a "Wall of Shame." The group, like other housing and consumer advocates, is calling for legislative measures to force mortgage companies to give struggling homeowners a break.

That includes a provision that would allow judges to alter mortgages in bankruptcy court, often called "cram down" in the housing industry. In addition to forcing modifications in court, supporters say, the threat of these judicial modifications would encourage mortgage companies to make more substantial modifications to more loans. The measure passed handily in the House earlier this year despite fierce opposition from financial interests, but died in the Senate after moderate Democrats voiced concerns.

Bankruptcy Revision Is Possible Now there are signs the measure could see new life. One senior Democratic Senate aide said party leaders in the chamber are likely to revive it this fall if another solution isn't found soon. And last week, Representative Barney Frank (D-Mass.), the powerful chairman of the House Financial Services Committee, made a similar warning, threatening that legislation the lending industry actually wants will go nowhere in his committee until there is a "significant increase" in modifications or lawmakers tack on the bankruptcy provision.

Without a significant rise in loan modifications, Frank added, "the argument for revising the bankruptcy option will be extremely strong, and I think there is a substantial chance that the outcome will be different."

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