Loan Modification Process: It's Still Not Making Sense


Last month the FHFA, the conservator of Fannie Mae and Freddie Mac , announced they would begin implementing a "Streamlined Modification Process" for borrowers as part of the Hope Now alliance of banks and lenders. Today they announced that it was underway and available.

The SMP provides a supposedly simpler way for troubled borrowers to get the help they need from servicers and lenders. According to Fannie Mae, it was "intended to help set standards in the mortgage servicing industry for conducting loan modification programs on a large scale as a foreclosure prevention measure." Borrowers have to meet certain "eligibility criteria and demonstrate financial hardship" to be eligible.

While I applaud the effort, I notice, once again, in the "modification options" section, that a real principal write down is not included in modifications. There is a principal forbearance option, but the borrower still has to make a balloon payment when the loan matures. The other options include extending the length of the loan, reducing the interest rate to not less than 3 percent and adding accrued interest to the principal balance of the loan.

These options may help some borrowers, but certainly not the bulk of borrowers who are underwater on their homes. Some of the options put off the inevitable, which is perhaps why the redefault rate is so high. Hope Now is scheduled to release new numbers on its success rate next week, and the folks setting that up vehemently deny the redefault numbers released last week by the Comptroller of the Currency.

The fact is, modification programs won't work unless the principal on the loan is written down, giving the homeowner at least some financial stake in the house. But we all know how willing lenders are to write down principal. Just look at the Hope for Homeowners program, the $300 billion program passed last summer by Congress where the FHA would guarantee new loan modifications if lenders wrote down principal. So far of the hundreds of thousands expected to be helped, only 312 applications have been filed. The lenders have to file the applications after they write down the principal.

I'm not especially keen on homeowner bailout plans, since I think a lot of folks knowingly took a gamble on housing, and I don't see why I have to pay for their losses. But if the government and lenders are going to claim they're out there helping homeowners, they should at least come up with a plan that makes sense.

Questions? Comments?