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Tomorrow the House Financial Services Committee, under the leadership of Chmn. Barney Frank, will grill mortgage servicers as members examine the "response to the mortgage foreclosure crisis." This is all about how banks are converting all those trial modifications under the government's Home Affordable Modification Program into permanent modifications.

Today, as a little precursor, the servicers were called over to Treasury for some browbeating and sandwiches, sorry, "to discuss the urgent need to convert eligible homeowners in trial modifications to permanent modifications," according to a Treasury spokesperson.

After the meeting, I sat down with Jack Schakett, of Bank of America

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[BAC  Loading...      ()   ]. He used to be chief of operations at Countrywide, which B of A inhaled after the crash of the banking system as we know it. Now Mr. Schakett is "credit loss mitigation strategies executive" at B of A.

Mr. Schakett told me that of the 65 thousand trial modifications set to expire Dec. 31st with B of A, a full two thirds of the borrowers, while current on their payments, have not submitted the full documentation required to turn a trial mod permanent under the HAMP guidelines.

"We don't really know the major reason why the customers are not returning the documentation," Schakett claims. Well I can tell you why (and I'm sure he knows this too). The trial modification process only requires oral verification of income to begin, but to go permanent, you need to prove your income, submit your tax returns, and basically come clean with all your finances. I'm guessing a lot of folks who took out their initial loans with false or non-existent documentation, aren't eager to let the government know that.

I put that question to Mr. Schakett, who didn't dismiss it, but said it was simply too early to make that conclusion. Last week B of A sent out 50 thousand "notices of incompletes," specifying exactly which documents the borrowers needed to submit to fulfill the modification requirements.

"We did it in express mail envelopes with return express mails with a time frame to stress our sense of urgency of what it requires to get this done because we don't want these customers to loose an MHA modification if we can help it," Schakett told me. He says the response will be very telling.

He also told me that Treasury is now considering upping the ante on the trial modifications, requiring much more documentation up front, so that banks won't have all these trial mods going with borrowers who inevitably won't reach permanent modification status.

Let me just say that I get a lot of email from borrowers, telling me that the banks are holding up their paperwork, losing faxes, messing up modifications and leaving those borrowers in the lurch. I don't dispute that, but I can't fully dismiss the banks when they tell me that 2/3 of the borrowers won't submit the paperwork. I also happen to know that a huge percentage of borrowers being offered modifications are rejecting them. They don't want to pay. Many are already gone.

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