Home Lenders Face Sanctions Over Failed Modifications

The U.S. Treasury Dept. will begin taking action against lenders that aren't doing enough to ease mortgage payments for troubled homeowners as part of the Obama Administration's $75 billion pledge to curb foreclosures. Lenders face "consequences" that may include sanctions and monetary penalties if they fail to perform under the Home Affordable Modification Program, the Treasury said on Nov. 30 in a statement, without being specific. The program requires banks that took federal aid to help homeowners at "imminent risk" of default by lengthening repayment terms, lowering interest rates, and making other changes to the mortgages to avert foreclosure. The Treasury is also requiring some mortgage servicers to speed the process for changing loan terms and to submit regular status updates. Bank of America (BAC) is among the worst performers in the program, based upon a Treasury Dept. measure of trial modifications as of October. Morgan Stanley (MS), Citigroup (C), and JPMorgan Chase (JPM) are among the best-rated. The Obama Administration, which set out in February to modify as many as four million loans, finds itself having to pressure lenders to convert more than 650,000 trial revisions made so far into permanent mortgage modifications. About 375,000 of those loans are scheduled to convert into permanent repayment plans by the end of the year, the Treasury said. "We must now refocus our efforts on the conversion phase to ensure that borrowers and services know what their responsibilities are in converting trial modifications to permanent ones," said Phyllis Caldwell, who runs the Treasury Dept.'s Homeownership Preservation Office. Seriously delinquent loans at 8.85%The Treasury plans to begin releasing data in December on how banks rank in making trial modifications permanent. The modification program was announced in February as a way to combat a surge in foreclosures that has depressed property values and curtailed economic growth. The program has been hampered partly by a rising unemployment rate, which reached a 26-year high of 10.2% in October. The foreclosure rate, as a result, jumped to a record 4.47% in the third quarter, from 3.3% at the end of last year, according to Mortgage Bankers Assn. data. Seriously delinquent loans—those at least 90 days late on payments—reached 8.85%, from 6.3% at the end of 2008. Eligible loans under the program must be at least 60 days past due, in foreclosure or bankruptcy, and have originated before 2009. The underlying property must be owner-occupied and conform to Fannie Mae (FNM) and Freddie Mac (FRE) loan limits, which can be as high as $729,750 in some areas. The data excludes Federal Housing Administration and Veterans Affairs loans. A borrower's mortgage payment must be 31% or more of gross monthly income. Mortgage servicers and lenders have said they are struggling to gather the necessary paperwork from borrowers. The Mortgage Bankers Assn., the industry's largest trade group, has said foreclosures won't peak until unemployment rates crest at some time in the second half of next year. A $1,000 cash incentive for servicersRobert Davis, executive vice-president of the American Bankers Assn. in Washington, said yesterday that unemployment is "the primary driver of defaults right now." He said he was "puzzled" by the stepped-up pressure. One purpose of the trial period "is to protect the taxpayer by making sure these loan modifications will work before anything is paid out to the lender," Davis said. "Suddenly, for that to become a measure of bad performance when institutions are doing everything they can, is just baffling." The Administration's initiative provides a cash incentive of $1,000 to the mortgage servicer once a loan is converted from a trial to a permanent modification, plus annual payments of $1,000 for as long as three years, provided the loan remains in good standing. Bank of America has started trial modifications on 14% of its eligible loans as of October, according to the Treasury. The Charlotte-based bank, the largest in the U.S. and the biggest mortgage servicer, has 990,628 eligible loans, a greater total than any other company on the Treasury list. A spokesman for Bank of America, Dan Frahm, has said the eligibility data may be overstated. "As many as one in three of those borrowers listed as eligible for the program will not actually qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31%, or is unemployed," Frahm said in a Nov. 10 interview. The Administration's program requires banks that received federal aid from the Treasury's Troubled Asset Relief Program, or TARP, as well as mortgage-finance companies Fannie Mae and Freddie Mac to lower monthly payments for borrowers at "imminent risk" of default.

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