“Part of it has been understanding how big the problem is,” says economist Dean Baker, co-director of the Center for Economic And Policy Analysis “They're also getting more experience about what's going to work and what isn't.”
Though industry players and analysts consider the Obama administration’s program fairly thorough and thoughtful, the modification process is still very labor intensive, involving painstaking analysis and documentation.
The Making Home Affordable program, which was conceived to assist as many as 7 million to 9 million needy homeowners, has offeredabout 325,000 trial modifications since late April, according to the Treasury Department. About 160,000 loans have been modified into lower-cost loans so far.
“There seems to be a ramp up and that’s good, but there are still execution issues,” says Andrew Jakabovics a housing expert at the Center for American Progress. “We're starting to see an impact from the modification program. I don’t think we're at a comfort point yet.”
More importantly, the program is still too young to offer any success rate data, partly because the modifications—which seek to reduce monthly costs through a variety of means including lower interest rates and principal reduction—are based on a three-month trial format. Treasury plans to report its full data on a monthly basis beginning August 4.
Finger In The Dike
The foreclosure situation is certainly not getting better, but some say it may be on the verge of stabilizing. That said, it has definitely become more of a mainstream, Middle America, middle class problem.
What was once the plague of unconventional mortgages—such as subprime and no-documentation loans—synonymous with the easy money days of the credit bubble is now the stuff of prime loans held by more creditworthy borrowers who are losing their jobs to the recession and thus becoming delinquent on their payments.
What’s more, a three-year side in housing prices has put many homeowners under water, such that houses are worth much less than the underlying loans, making it difficult for people to refinance and reduce interest costs on adjustable rate mortgages with ballooning payments.
“I think the perception of the nature of the problem has changed,” says Jakabovics. “I think there is greater political will to do something. I think the drumbeat is only going to get louder. It's very real and very personal and I think Congress and the administration intuitively understand that.”
Attacking The Problem
The Making Home Affordable is designed to help homeowners already in trouble (the loans have become delinquent) and those who may be heeded for it. Loan services receive a fee of $1,000 per loan modification for the former, and an additional $500 for the latter. In addition, they receive a $1000 a year for three years if the modified loan stays current.
The program also covers underwater borrowers. What’s more, the loan-to-value ratio, which started out at 105 percent, is now 125 percent, meaning a homeowner with a $250,000 loan on a property valued at $200,000 is eligible for refinancing aid.
“We need strong refinance opportunities so they don’t go into delinquency and foreclosure,” says Faith Schwartz, executive director of Hope Now Alliance, the mortgage industry’s foreclosure prevention program.
Early intervention and prevention has long been considered a key to greater success in foreclosure mitigation, just as a write down in principal—as opposed to a simple interest rate reduction or extension on the life of the loan—is considered essential in boosting modification success rates.
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Analysts say mortgage industry players are slowly but surely accepting that concept, even if it means eating a bigger initial loss.
The latest mortgage metrics report of federal regulators—prepared by the Office of the Comptroller of the Currency and the Office of Thrift Supervision—reflects that change in strategy.
“More than half of the modifications in the first quarter of 2009 resulted in lower monthly principal and interest payments, as servicers focused on achieving more sustainable mortgage payments,” the report states.
Modifications that reduced monthly payments by 20 percent or more jumped 19 percent from the previous quarter, to 29 percent of all modifications, according to the data.
Redefault rates after 3-, 6-, 9- and 12-month periods for loans that were reduced by 10-20 percent or 20 percent or more were significantly lower than those with no change in payment.
“To make modifications that stick you have to do something about the outstanding principal,” says housing consultant Edward J. Pinto, a former chief credit officer at Fannie Mae. “Slowing down the inevitable doesn’t so anyone any good.”
With loss severity rates for foreclosures at record highs (in some cases running 40-60 percent of the original loan value), some lenders and services are seeing clear advantages to writing down principal.
“If you can work out a reduced payment plan they get to keep their home,” says Paul Koches, chief legal officer and EVP at Ocwen , one of the nation’s largest servicers. “If we have to foreclose on one, we don’t have the continuing service fee. It’s about finding a repayment plan that is truly sustainable.”
Overall, almost 17 percent of Ocwen's modifications have involved principal forgiveness, with an average reduction of almost $31,000.
Fits And Starts
The MHA has experienced the usual start up problems, which may partly explain its lower-than-expected volume.
Jakabovics, for one, says based on the program’s goal of helping 3 million to 4 million homeowners over two years, he would expect to see 750,000 loans processed in the first six months.
“It’s a very thoughtful and thought threw but it is a very complicated program,” says Faith Schwartz, executive director of the Hope Now Alliance, the mortgage industry’s foreclosure prevention program, which has helped 4 million homeowners since its inception in October 2007.
Schwartz, Jakabovics and others cite technology and staffing issues in particular for some of the loan servicers.
Thus far, 27 have signed on, including units of all the major financial firms, such as JPMorgan Chase , Citgroup, Wells Fargo , Bank of Americaand Goldman Sachs
“You have to automate this or you won’t be scaleable," says Schwartz ”You have to reprogram [software] systems to integrate with the government program.”
Though some of the services have struggled with integration, Florida-based Ocwen has had no such problems.
“It didn't take us very long to tweak our processes to adjust,” says the company’s chief legal officer and EVP, Paul Koches.
Ocwen has already contacted about 59,000 homeowners under MHA and executed 5,464 modifications.