Why Many Home Loan Modifications Fail

Why are so few temporary mortgage modifications turning permanent?

One reason may be the same one that a lot of bad loans were made in the first place. Borrowers can declare their income, and the banks are willing to grant temporary modifications based on those figures, without any evidence to confirm them.

But to make a modification permanent, the banks have to see proof of income, and the borrower has to make three monthly payments of the new lower amount. In most cases, those requirements are not being met.

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The banks, and the government, are soon going to have to decide what to do about borrowers who are making the modified payments but have not provided the documents after repeated efforts to obtain them. Should the banks just take the money and let the preliminary modification turn permanent? Or should they foreclose?

Those decisions will affect just how fair the program is seen to be. If the banks allow those who do not submit documents to get by without doing so, it will appear unfair to those who told the truth about their income, and paid more than they might otherwise have been required to pay. If they do not, the wave of foreclosures could devastate more neighborhoods.

The rules now being applied, in some cases clumsily, had a Goldilocks quality; to get a modification a borrower had to need it a lot, but not too much. If the home was “underwater” — worth less than the balance of the loan securing it — but the borrower could still afford the payments, there was to be no modification. If the borrower was in such bad straits that default was likely even with a modification, again that borrower was supposed to be turned down.

And banks were supposed to refuse modifications if they could do better by foreclosing, whatever the effect on the borrower.

Nearly two months ago, I spent a day at a JPMorgan Chase

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[JPM  Loading...      ()   ] call center in Jacksonville, Fla., where employees had once worked the phones trying to persuade people to take out mortgages. Now the hundreds of desks were filled by people trying to arrange modifications of loans made by Chase or Washington Mutual, whose assets JPMorgan Chase acquired after that bank was closed by the government.

One of the most frustrated Chase employees I met was Domonique Perez, whose job was to round up the documents from borrowers who had been granted temporary modifications.

It was, she said, not going well.

She told of one man who had filed almost all the necessary documents — the permission slip for Chase to look at old tax returns, the pay stubs for current income — but not the affidavit of financial hardship. She had called and called, she said, and sent letters by regular mail and by FedEx, but the man was not getting back to her.

When I called Ms. Perez again this week, she did not recall what had happened in that case. But over all, she said, “it’s getting a little better. I’m getting a lot more files that do have all the documents.”

It will need to get a lot better. Chase disclosed in November that nearly a quarter of trial modifications had failed because the borrower did not make even a single payment, and that nearly half had failed to make all three payments required before the modification could become permanent.

Of those who had made all three payments, only about a quarter had submitted all the required documents.

Updated numbers will be released next week. “It is getting better,” David Lowman, the chief executive of Chase’s mortgage business, told me this week. But the gains are in contrast to a very low level of compliance.

In Washington, there are suspicions that banks simply are not trying, that they do not really want to make modifications. There is talk of shaming them into action. Tempers may run hot when bankers meet with Treasury officials on Monday and then testify before a Congressional committee on Tuesday.

Listening in on calls to the Jacksonville center gave me a perspective on what was going on.

The Chase representatives appeared eager to approve modifications, and were prepared to believe anything people said about their income. Modifications went to those who came up with the right income number, neither too high to qualify nor too low to be likely to meet the modified payments.

I listened to one call from a woman who sounded as if her world were collapsing. She and her husband operated a business, which seemed to be teetering near collapse, and its finances were intertwined with theirs. They were behind in payments on their mortgage.

Under the administration’s mortgage modification program, the new payment, including escrow payments for taxes and insurance, is to be 31 percent of the borrower’s gross monthly income. The woman first said their income was $6,000 a month, the amount they had taken out of the business when times were good.