Interest Rate Roundup

Friday, July 10, 2009

Mortgage mods not keeping up with expectations

I said back when the Obama administration's mortgage modification programs were being rolled out that they would likely NOT meet the ambitious expectations spelled out by policymakers. There are several reasons why mortgage servicers and investors are not as willing (or able) to modify loans as aggressively as the politicians want them to. A great Federal Reserve Bank of Boston paper (PDF link) chronicled some of them a few days ago. Here is the abstract from that paper (emphasis is mine):

"We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small, and for subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors."

Now, the Wall Street Journal is weighing in, noting that HUD and Treasury are putting pressure on the servicing industry to get with the program. Here's an excerpt from that story:

"More than 270,000 borrowers have received modification offers under the program. But housing counselors complain many borrowers are waiting for help as mortgage-servicing companies get up to speed. The administration has said its program could help as many as four million homeowners.

"The administration has "started to see a significant ramp-up" in modification activity, the letter said. But it added, "there appears to be substantial variation among servicers in performance and borrower experience." It called on mortgage-servicing companies to beef up staffing and training, and to provide "an escalation path for borrowers dissatisfied with the service they have received." Freddie Mac, which serves as compliance agent for the program, will be developing a "second look" process in which it will audit a sample of rejected modification applications, the letter said.

"The letter also called on mortgage companies to suggest ways the administration can improve the program's design.

"Housing counselors say they have been disappointed by the lack of progress under the administration's program. "We are not getting anywhere near the level of resolutions we expected," said Bruce Dorpalen, national director of housing counseling for Acorn Housing Corp., which works with financially troubled borrowers. "The real issue is that generally the servicers are not up to speed."


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