BOB SHIEFFER: Just when we thought it couldn’t get any worse now we find that this sloppy paperwork by the lenders may have made some of these foreclosures now that are being contemplated invalid. Some of the biggest lenders are now freezing foreclosures until they can get all this straightened out. I guess the first question I would have is does the administration favor some kind of national moratorium on these foreclosures to get this all sorted out?

DAVID AXELROD: First of all, Bob, it is a serious problem. It’s thrown a lot of uncertainty into the housing market that is, you know is already fragile. And it’s — and it’s bad for the housing market and it’s bad for these institutions which is why they’re scrambling –

BOB SCHIEFFER: Hm.

DAVID AXELROD: –now to– to go back through and– and– and through their documentation for all of this as they should. The President was concerned enough to veto a bill that came to him last Thursday, that would have unintentionally made it perhaps easier to make mistakes. And, so we are concerned. We’re working with these institutions. I’m not sure about a national moratorium because there are, in fact, valid foreclosures that — that– that probably should go forward. And where the documentation and paperwork is — is proper, but we are working closely with these institutions to make sure that they expedite the process of going back and reconstructing these and throwing out those that don’t work.

BOB SCHIEFFER: Well, I mean, I guess people are worried about what do you think the impact this is going to have on an economy that’s pretty shaky right now anyway?

DAVID AXELROD: Well, look, our hope is that this moves rapidly and that this gets unwound very, very quickly and that they — they — they can go back reconstruct their paperwork and what we’ve stressed to them is that they need to expedite that process and work very, very quickly to get it done. And we’re going to continue to — to push for them.

This is tantamount to the White House saying: “We think the banks should just deal with this themselves, and despite the now tremendous evidence of systemic fraud in mortgage documentation, we trust them to do so appropriately.”

Granted, there is no easy solution here. Seizing the housing markets right now could force a double-dip in house prices, putting more people underwater, begetting more unemployment. But saying that the White House is working for banks rather than advocating for homeowners seems wrong.

Instead, the White House might consider saying something like this: “We’re not going to let banks repossess any home without due process. That is not to say we’ll halt foreclosures, but that we’re assuring homeowners we’re on their side. At the same time, we’re working to bolster the HAMP program, and considering pushing forward right-to-rent and cramdown legislation as well. Those programs will help families through the foreclosure crisis, keeping them in their homes while, secondarily, assuring stability in the banking sector and in mortgage finance.”

Even the government’s own watchdog over HAMP — Neil Barofsky, the special inspector general over the Troubled Asset Relief Program — has blasted it as inefficient and ineffective at stopping the foreclosure crisis. He has also lambasted Treasury for sexing up its statements about the program:

Treasury clings to its prior statements that it plans to offer trial modifications to three to four million homeowners, a measure that SIGTARP has previously shown to be essentially meaningless. Treasury’s refusal to provide meaningful goals for this important program is a fundamental failure of transparency and accountability that makes it far more difficult for the American people and their representatives in Congress to assess whether the program’s benefits are worth its very substantial cost.

But now, James Pethokoukis reports at Reuters, the Obama administration might be pushing for a very, very big improvement to HAMP indeed. Rather than modifying mortgages, the Obama administration might instruct Fannie Mae and Freddie Mac to write down the mortgages, reducing the principal rather than the monthly payments:

Main Street may be about to get its own gigantic bailout. Rumors are running wild from Washington to Wall Street that the Obama administration is about to order government-controlled lenders Fannie Mae and Freddie Mac to forgive a portion of the mortgage debt of millions of Americans who owe more than what their homes are worth. An estimated 15 million U.S. mortgages — one in five — are underwater with negative equity of some $800 billion. Recall that on Christmas Eve 2009, the Treasury Department waived a $400 billion limit on financial assistance to Fannie and Freddie, pledging unlimited help. The actual vehicle for the bailout could be the Bush-era Home Affordable Refinance Program, or HARP, a sister program to Obama’s loan modification effort. HARP was just extended through June 30, 2011.

He describes the timing as political:

The president’s approval ratings are continuing to erode, as are Democratic election polls. Democrats are in real danger of losing the House and almost losing the Senate. The mortgage Hail Mary would be a last-gasp effort to prevent this from happening and to save the Obama agenda. The political calculation is that the number of grateful Americans would be greater than those offended that they — and their children and their grandchildren — would be paying for someone else’s mortgage woes.

The question is whether this really is a good move politically if housing has stabilized. It will be expensive, very, very expensive. And my guess is that Republicans would love to campaign on this, easily and rightly characterized as a mass taxpayer bailout of underwater homeowners. For that reason, I would be surprised to see the administration do it. Forcing the banks to enact cramdown or changing bankruptcy laws would be one thing. But doing this through Treasury, politically, would be quite another.

Rep. Barney Frank (D-Mass.) and President Obama have proposals to help unemployed homeowners facing foreclosure. (Zuma Press)

Sandra Monroe-Olcott of the Montclare neighborhood of Chicago is in the same position as hundreds of thousands of Americans. She lost her job on April 1, 2008. She applied for unemployment insurance — $804 every two weeks — and immediately started searching for another position. Her husband, now 74, had stopped working and receives Social Security. Her household also includes her elderly father and her son, until recently unemployed and now earning $4.30 an hour as a part-time waiter. The government benefits would tide the family over until she found a new position, she thought. But she never found one.

[Economy1] At the end of March, she received her last unemployment insurance check, becoming one of the million 99ers who have exhausted federal and state benefits. The family went into survival mode. They sold their car, their truck and all of their jewelry except for their wedding bands. They cashed in their insurance policies and 401k. Still, the bills kept coming.

“When that lifeline was cut, so was the mortgage payment,” Monroe-Olcott said. “Last month I used my credit card to take a cash advance to pay my mortgage, knowing that the interest rate on a cash advance is very high, and not knowing how I am going to pay it when the bill arrives. But I was desperate and scared, since I already received an ‘Intent to Foreclose’ letter. I have sold everything I possibly could to make it this far.

“There is nothing else left worth anything. I even rented out the garage, but that person also became unemployed and couldn’t afford the rent. The bank asked me if I would consider selling the home. There are five properties for sale on my block and [they] have been for sale for two years. If I could manage to sell my home” — she laughed — “it would sell for what I owe the bank. Then where would I live? [I would have] no income to pay the rent, even if the landlord overlooked my bad credit check.”

Monroe-Olcott’s predicament is governed by the fundamental equation of the economic crisis: Unemployment drives foreclosure, and the two are jointly destroying middle-class wealth as the effects of the recession linger on. The Obama administration’s efforts to help such homeowners thus far have faltered, failing to put a dent in the wave of home losses. Two new programs are specifically designed to help unemployed people undergoing foreclosure, like Monroe-Olcott. But for many, it might be too little, too late.

This week, the Home Affordable Modification Program — the administration’s flagship effort to help homeowners by letting them refinance for lower monthly mortgage payments and thereby avoid foreclosure — reported dismal numbers. In recent months, the program has kicked out far more homeowners than it has helped. It has completed only 346,000 modifications — though it initially set its sights on three million.

As Mike Konczal of the Roosevelt Institute argues, loan modification generally increases the loan balance by capitalizing the fees to alter the mortgage, leaving homeowners even deeper underwater. An analysis by state regulators shows that 70 percent of mortgage modifications bump up the size of the loan. Just 120 HAMP modifications since March have included principal reduction, according to a report by the Office of the Comptroller of the Currency and Office of Thrift Supervision released on Wednesday. Testifying before the Senate Finance Committee, Neil Barofsky, special inspector general for the Troubled Asset Relief Program, said the HAMP program “risks being remembered not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals and meager results.”

Worse, the Obama administration’s foreclosure proposals have done little to aid the more than a million Americans who are both unemployed and undergoing foreclosure proceedings, since reducing monthly mortgage payments does little for borrowers who have no income. The vast majority of homeowners in foreclosure have suffered some sort of “income shock,” most often due to unemployment or underemployment. HAMP reports that 58 percent of its applicants cite unemployment as the primary reason for foreclosure. And a recent study by economists at the Federal Reserve shows that four in five subprime mortgage holders who default do so due to income loss.

But this week, the Obama administration is moving on two little-noticed provisions that finally address the crisis of unemployed homeowners facing foreclosure and possibly enact more effective measures than mortgage modification. On Wednesday, President Obama gave final approval for the $1.5 billion Hardest Hit Fund, proposed this winter to help homeowners in the states most impacted by the unemployment and housing crises. The states — at first just California, Nevada, Arizona, Michigan and Florida — have already come up with “innovative” proposals to keep homeowners in homes using federal funds. Now, the federal government will give them hundreds of millions to enact them. The measures include cramdown, or principal reduction, cited as the most effective method to staunch foreclosure; and pools of money to help foreclosed families pay arrears. And some states will give unemployed homeowners like Monroe-Olcott low-interest loans to help make mortgage payments.

A similar measure is also in the financial regulatory reform bill, currently being completed in conference committee and expected to be finished by July 4. Rep. Barney Frank (D-Mass.) has requested that the final bill include a House provision providing low-interest loans to the unemployed facing foreclosure. The provision is modeled after Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Program, or HEMAP, which has successfully helped 43,000 unemployed mortgage-holders. The $3 billion national program would offer unemployed homeowners low-interest loans for up to $50,000, funded from the Troubled Asset Relief Program, to help them pay their mortgages for up to two years until they find jobs. Homeowners would make low payments to the Department of Housing and Urban Development during the spell of joblessness, and then repay the government after finding work.

The fate of the proposal remained uncertain as of the time of this article’s writing. Frank said that rather than taking the funds out of TARP, he might assess very big banks and hedge funds. “I think it would be a good thing for some of those very highly paid employees to contribute some money to help people losing their homes because in many cases it was their misjudgments that led to that happening,” Frank told reporters on Wednesday.

Housing experts say that the provisions should help those hardest hit by the employment and housing crises, but worry that the damage might be done. Already, banks have foreclosed on millions of homes, and 5.5 million more are in the foreclosure pipeline. Barry Zigas, the director of housing policy for the Consumer Federation of America, lauded the efforts but noted that they have the hallmark of most of the administration’s policies towards the unemployed facing housing loss: They do not address the root cause of being underwater or unemployed.

“The new [Wall Street reform bill’s] initiative plus the 10 states that the administration has provided money to for pilot programs to help the unemployed facing foreclosure will be helpful. But ultimately, it is job creation — genuine job creation — and the extension of unemployment benefits that will help the situation,” he said. “If we loan [unemployed persons facing foreclosure] money and then don’t do anything to help them get jobs, it is nothing but a temporary palliative.”

Unemployment is not expected to decline anytime soon, meaning that even if the government gives homeowners facing foreclosure two-year loans, some percentage will still be members of the long-term unemployed, often underwater on their mortgages, in 2012 or later. And the Obama administration thus far has not thrown its weight behind two provisions that might make actual dents in the housing crisis writ large: cramdown and right-to-rent, which would give homeowners the right to rent their home after defaulting on their mortgage.

In the meantime, those out of luck continue to wait. Out of options, Monroe-Olcott decided to apply for a loan modification from her bank. (Her mortgage has been sold between banks five times.) “If we are foreclosed on, I could put my father and husband in a nursing home, and me and my son will walk the streets. There is no welfare if you own a home, and you can’t get welfare if you do not have a permanent address!” She expects to hear back from Chase in 60 to 90 days.

The GOP offered its provision as “motion to recommit,” which is one of the minority party’s few ways to amend a bill on the floor. Known as an MTR, the motion is generally stripped out in the Senate if it is adopted in the House. Such measures are put forward more to score political points than to craft policy, but the mood of the House can sometimes be gleaned from the vote’s outcome. In this case, Democrats chose not to fight, and accepted the motion with a simple voice vote.

In a letter regarding the motion to recommit, a staffer in Minority Whip Eric Cantor’s (R-Va.) office says that strategic defaulters are stopping paying their mortgages, staying in their homes and using the money to buy trips to Disneyland and cruises. The tone is vituperative.

Of course, there is a kernel of truth there. Yes, some people are giving up on their mortgages and using the money to go on vacation. But, by and large, people who stop paying their mortgages — taking on the risk that they will at some point be evicted, and knowing it will ruin their credit scores — are economically distressed. The ones Republicans are complaining about are buying SUVs. Most are buying things like groceries.

Moreover, the Republican letter seems to imply that strategic default needs to be legislated away, and its perpetrators punished. But strategic defaulters are not committing some felony or crime. They are not even really breaching their contracts. Every mortgage contract spells out what happens if the homeowner does not pay: The bank evicts them and takes the home.

Furthermore, the Republican letter does not spell out how the government would designate someone as a strategic defaulter anyway. Strategic defaulters are people who could continue to pay their mortgages but choose not to. Defaulters are people who cannot continue to pay their mortgages. But does the government really want to stipulate that homeowners have to hand over, say, up to their last $2,000 of savings to the bank before they can walk away from their home? Up to their last five percent of annual income? What if those people need the money to move, or to pay medical bills, or to buy shoes for their kids? Since when have Republicans advocated telling Americans how they can and cannot spend their money?

Plus, does the Republican Party really want to prevent strategic defaulters, who now number in the hundreds of thousands, from accessing fair, reasonably priced mortgages in this sluggish housing market? The banks, given the credit scores and credit histories they have access to, have plenty of ways to determine whether a prospective borrower is mortgage-worthy. I would leave this up to the private sector.

Finally, the way to tackle this problem is to … lower the number of strategic defaults. The best way to do that is to make sure that the recovery is strong, employment is growing and that homeowners are not underwater. Improving the Home Affordable Modification Program and “cramdown” provisions would go a long way to reducing homeowners’ monthly payments and principal, helping to keep them in their homes.

Here is the full text of the letter, posted by HuffPo:

From: Vieson, Chris

Sent: Thursday, June 10, 2010 10:15 AM

Subject: WHIP LD Alert: Republican Motion to Recommit FHA Reform
The Republican Motion to Recommit H.R. 5072, the FHA Reform Act, would amend the bill to prohibit individuals who strategically default on their mortgage from accessing the FHA program and protect taxpayers from financing a bailout of FHA programs.

Strategic Defaults

A strategic default occurs when a borrower decides to stop paying their mortgage even though they can still afford their payments. It is usually undertaken by those who owe more on their mortgage than their home is currently worth.

The Wall Street Journal has reported on families that have chosen to stop paying their mortgage and instead use the extra money they are saving each month to “buy season tickets to Disneyland…take a Carnival cruise to Mexico…” and go out to dinner more often.

Companies have even sprung up to capitalize on the new trend with websites advising people (for a fee) on how to go about a strategic default. These companies actually advertise that after a few years an individual who chooses to default on their mortgage should be able to buy a home again, including through government loan agencies.

60 Minutes reported on individuals who defend their decision to strategically default saying, “…with the money savings that I will have in four to six years, I’m confident I’ll have money to buy my way into a house if I want to.”

Strategic defaults raise costs for responsible borrowers, many of whom may currently be struggling to make their mortgage payment themselves, but who take their obligations to pay their debts seriously. The MTR would ensure that no one who chooses to simply stop paying their mortgage, even though they can afford to do so, is able to benefit in the future from the government’s FHA program.

Future Bail-Outs

The Republican motion also protects American taxpayers from possible future bailouts of FHA programs. Washington currently has a bailout culture at the expense of hard-working Americans and this MTR puts into place protections against FHA receiving a taxpayer-backed bailout.

The Republican MTR is a vote to expose and prevent fraud and abuse from FHA and protect the American taxpayer from another Washington bailout.

Rep. Edolphus Towns (D-N.Y.), chairman of the Oversight panel, just announced a March 25 hearing to appraise Obama’s anti-foreclosure efforts, particularly the Home Affordable Modification Program. That initiative was sold as a way to help 3 to 4 million struggling homeowners by offering lenders financial incentives to modify mortgages voluntarily. As of last month, only 116,000 permanent mods had been finalized — a number that’s left lawmakers on both sides of the aisle unhappy with HAMP’s progress.

Next week, they’ll have even more data to scrutinize. Neil Barofsky, lead watchdog over the Troubled Asset Relief Program, is scheduled will release his report on HAMP management.

Other witnesses will include Herbert Allison, Jr., the Treasury’s assistant secretary for financial stability, and Gene Dodaro, who heads the U.S. Government Accountability Office.

The reasons behind the gathering are clear: While Wall Street is back to sipping champagne (literally), more than 308,000 homeowners suffered foreclosure last month alone, up 6 percent from the year before, according to RealtyTrac.

President Barack Obama (WDCpix)

Only a year ago, hopes were high that a big push by the government to stop foreclosures would be a great success, living up to its billing as “Help for America’s Homeowners.”

Last January started out with a foreclosure moratorium, allowing time for the Obama Administration to put the final touches on Making Home Affordable — its $75 billion signature program aimed at helping 3 to 4 million homeowners. After bailing out banks and the financial system, the administration turned its efforts to borrowers on the verge of losing their homes. The program rolled out with fanfare in the spring.

[Economy1] But as 2010 begins, it is already clear that Making Home Affordable has fallen far short of its goals, with only 31,382 permanent loan modifications completed by Nov. 30. Last year, lenders were doing far more loan modifications on their own, before the Obama plan was launched. And although foreclosures show no signs of slowing down — the total number of foreclosures is predicted to reach 13 million during the next five years — no one is expecting a dramatic turnaround in helping people keep their homes. The only way the administration will get significant numbers of loan modifications done will be to bring back failed bankruptcy cramdown legislation, or to put billions of dollars into a mass effort to rework loans — neither of which seems politically feasible.

That means 2010 will likely be another year in which only a small number of loans get modified each month, while administration and mortgage servicers continue pointing fingers at each other for the impasse, some industry experts say. The only bright spot ahead for the government’s foreclosure prevention may be that down the road, foreclosures eventually will slow of their own accord. To use the Vietnam analogy, that will allow the Treasury Department to declare victory and get out of the loan modification business for good.

“I don’t hold out a great deal of hope that the administration will do more” to complete more loan modifications, said Patricia McCoy, a University of Connecticut law professor who studies financial services regulation. “There’s just no political will for that.”

As the program falters, a move to blame borrowers for problems with the effort has grown.

When difficulties with Making Home Affordable became apparent early on, servicers began contending that borrowers were refusing to provide income verification and other paperwork to quality for permanent modifications. Under Making Home Affordable, eligible borrowers first receive a three-month trial modification. In order to convert it to a permanent modification, they need to provide servicers with pay stubs and other documentation, as well as making all their trial payments.

Before the program began, servicers voluntarily completed 120,000 permanent loan modifications per month during the first quarter of last year, according to Alan White, a Valparaiso University law professor who studies loan modifications. Once the Obama administration’s program rolled out, those totals dropped to about 70,000 per month, as servicers worked to switch borrowers into Making Home Affordable. According to Treasury Department figures, nearly 700,000 trial modifications under Making Home Affordable were underway by the end of November. But with fewer than 32,000 converted to permanent modifications, it means a net drop of permanent loan modifications since the Obama plan began.

The voluntary plans by servicers, however, were called “extend and pretend” plans by critics, who said servicers simply were setting up repayment plans with late fees and other charges rolled into them, without ever actually reducing a borrower’s debt. Re-default rates on those loan modifications have been high as a result. Making Home Affordable has been more aggressive about lowering a borrower’s monthly payment, and the government is pressing servicers to switch to using its program — one reason why Making Home Affordable permanent loan modifications are lagging behind. In addition, some borrowers simply can’t qualify for the government’s program because they are too far underwater on their mortgages.

But unless a surge of permanent loan modifications suddenly occurred in December, the New Year will begin with fewer loans permanently reworked than during the same period a year ago. Treasury officials said in November that 375,000 trial loan modifications were scheduled to expire by the end of December, but it was unclear how many would be converted into permanent plans. Then, on Dec. 23, the government announced it would order servicers to give borrowers more time to complete trial loan modifications before kicking them out of the program.

Servicers have responded to the lack of progress so far by suggesting that borrowers are refusing to turn in income and other documentation because they probably lied about their incomes to qualify for their current mortgages. Liar Loans, or loans that required no documentation of income or assets, have been cited as a major culprit in the financial collapse, as some borrowers began defaulting on them just a few payments into their mortgages beginning in 2006.

Guy Cecala, publisher of Inside Mortgage Finance, which covers the lending industry, said the mortgage firms and servicers were skeptical from the start that any loan modification plan would work. “No one ever thought seriously that this would put a dent in the problem,” he said.

Now the industry is likely to fight back against any criticism not by doing more loan modifications, but by blaming borrowers, as well as the Obama administration, for a faulty program. All this may add to a backlash and moral hazard charges of helping out homeowners who may have lied to buy bigger homes than they could afford, while other homeowners who may have lost their jobs struggle to meet their mortgage payments, he said.

“I hear people saying all the time, that all the administration is doing is offering help to the people who deserve it the least,” Cecala said.

Housing counselors and attorneys find that argument infuriating. Already struggling to get servicers on board with Making Home Affordable, they now also face dealing with a shift in a public perception toward blaming the borrower.

Diane Thompson, an attorney with the National Consumer Law Center, said the situation has gotten so ridiculous that servicers are simply looking for excuses to deny loan modifications.

“I met with a woman who oversees a counseling program in St. Louis, and she told me that the most common reason for denials now is that the borrower’s hardship isn’t permanent — surely at some point in time the borrower will get a new job,” she said. “And of course servicers continue to lose documents at an astounding rate.  Any counselor I talk to is almost seething with frustration.  I’ve had counselor after counselor in recent weeks tell me, “They’re just stalling.”

“I think there’s a bit of a face-off developing between the administration and servicers.  My impression is that servicers find the program burdensome and so would like to see it fail, but would prefer not to be held accountable for that failure.  And the administration, of course, would prefer to see the program succeed.  Whether this results in a scrapping of the program or a major reworking of it, I have no idea.”

White, of Valparaiso, thinks the situation is even more dire.

“I would give it another month or two to see if they can do any better, but if not, it is definitely time to try something else,” he said of Making Home Afforable loan modifications. “As far as blaming the homeowners, that is really sad.  From all reports I hear from housing counselors and legal aid lawyers, the servicers are losing the documentation.  It is hard to believe that 75 percent of borrowers on temporary mods are making their payments but that they can’t come up with two pay stubs and a hardship statement.  I think we are dealing with a massive failure and breach of contracts by the servicers.”

The administration will handle this by continuing its current tactic of singling out for public condemnation servicers who aren’t doing enough loan modifications. But that approach hasn’t worked so far, and it’s not likely to be any more successful this year, said Kathleen Engel, a Suffolk University law professor and expert on mortgage securitization.

“A shame list may work when country club members don’t pay their dues, but I don’t think it works with servicers and lenders,” Engel said. “If it did, they wouldn’t have been making and financing abusive loans all these years.”

What might work would be a massive, multi-billion dollar effort to get loans modified on a large scale, said Cecala, of Inside Mortgage Finance. But there would be little political support for spending that kind of money on troubled homeowners. Since the Obama administration sat back last year and declined to throw its weight behind mortgage cramdown legislation that ultimately failed, the White House is not expected to suddenly turn around and once again push for legislation to let bankruptcy judges modify mortgages to keep borrowers in their homes.

And not everyone agrees on the right approach to jumpstart the program. McCoy, for example, said she considers loan modifications a “one size fits one” option that can’t be done a mass scale.

As a result, Cecala sees an entirely new direction in 2010 — lenders will enlist debt collection agencies to aggressively go after homeowners who walk away from their underwater mortgages. Or lenders will move to ensure a borrower’s credit remains impaired for a decade or more, should they walk away. In the meantime, the Obama administration will likely talk a good game, and keep criticizing servicers, while only small numbers of homeowners end up with lower payments.

In the end, Cecala said, the only thing that will become clear is that “there’s plenty of blame to go around” for a program that began this time last year with lofty expectations, and then fell painfully short.

Homeowners who were hoping for lower payments are discovering to their dismay that lenders roll late fees, back taxes or other costs into the principal, sometimes turning a difficult payment into an impossible one. That is one reason that many reworked mortgages are sliding back into default.

Yep. There’s a big difference between writing down the loan balance on a house, and merely setting up an “extend and pretend” repayment plan. If you can’t afford the house now, you’re probably not going to be able to afford it later, especially with all the new fees added on.

The problem is the same one that has plagued loan modifications from the start: Lenders don’t want to write down loan balances. There’s no cramdown provision in bankruptcy court to force them to do so, thanks to opposition in Congress and inaction by the Obama administration.

Yet, as loan modifications fail to stem the foreclosure crisis, the government continues to offer financial incentives to servicers and calls them to Washington occasionally to give them a hard time about not doing more loan mods.

And in the end, here’s what we’re left with, according to USA Today:

“Payments have gone up …. (and) the payment relief can last for the first few years and then go up (again),” says Alan White, assistant professor of law at the Valparaiso University School of Law in Valparaiso, Ind. He has studied the subprime mortgage situation for 10 years. “(The lenders) focus on today and not on the future.” Even under the Obama plan, they don’t focus on permanent debt reduction, White says.

The majority of borrowers who’ve gotten mortgage modifications have seen their overall principal balance go up, according to an analysis by CreditSights and ICP of about 660,000 mortgages modified this year. In about 90% of the modifications, the principal balance after a modification was larger, CreditSights said.

If you’ve ever wondered why the foreclosure crisis doesn’t seem to be easing, despite the government’s vow to help homeowners, loan mods that actually increase a borrower’s monthly payment are an obvious reason why.

In response to discussion today in the House Financial Services Committee raising the possibility that a regulatory reform bill could include provisions allowing bankruptcy judges to modify mortgages on primary residences, MBA Chairman David Kittle issued the following statement.

“Allowing judges to retroactively modify borrowers’ mortgage balances will destabilize a mortgage market that desperately needs stability right now.

“Treasury officials today reported that the Obama administration’s Home Affordable Modification Program – HAMP – is on target to reach its stated goal of 500,000 trial loan modifications by November 1.  We ought to let that program, still in its early stages, continue to take hold, rather than rushing to try to pass a measure that will do more harm than good.

“We hope that proponents of cram down will recognize the successes that the industry is making through HAMP and other means to help keep borrowers in their homes.  Loan modifications cannot happen overnight.  But as today’s report from Treasury shows, servicers are making significant progress.”

Calling the progress on loan modifications “significant” is stretching it, since only about 12 percent of eligible borrowers have signed up for trial loan workouts under the $75 billion Making Home Affordable plan. It shows how far apart the two sides are on this issue – and gives a glimpse of the tough fight ahead for any kind of financial regulatory reform.

Matthew Padilla at Mortgage Insider offers a possible solution:

A simple compromise is to allow cramdowns but pass a bill that says they will only apply to loans made starting in 2010. That will give the industry some months to adjust.

Cramdowns could be one key factor in avoiding another housing bubble and financial meltdown.

But not if the Mortgage Bankers  Association and all the other powerful financial groups that continue to oppose cramdown get their way, once again.

]]> http://washingtonindependent.com/58602/financial-services-industry-wastes-no-time-fighting-cramdown/feed 7 http://washingtonindependent.com/58516/mortgage-servicers-bought-loans-blindly http://washingtonindependent.com/58516/mortgage-servicers-bought-loans-blindly#comments Thu, 10 Sep 2009 20:40:49 +0000 Mike Lillis http://washingtonindependent.com/?p=58516 Here’s a fascinating exchange between Rep. Maxine Waters (D-Calif.), chairman of the House Financial Services subpanel on housing, and Mary Coffin, executive vice president of Wells Fargo‘s mortgage servicing division, during yesterday’s hearing to examine how effectively the administration’s voluntary mortgage modification program is preventing foreclosures. (More...

But the Obama administration is signaling clearly that while it may be open to some new tactics, cramdown is not one of them.

Assistant Treasury Secretary Michael Barr told reporters on Wednesday that “Bankruptcy reform is an additional tool, but it’s not the focus of our efforts to keep people in their homes,”  The Wall Street Journal reported. In plain English, that basically means the administration isn’t going to support any renewed efforts to get a cramdown bill passed.

And Barr’s comments came after Treasury released a report noting that only 12 percent of eligible borrowers have started trial loan modifications under the $75 billion mortgage foreclosure prevention plan.

Supporters of cramdown say it’s necessary as a backstop to force servicers to try harder to complete loan modifications. Incentive payments to servicers for reworking loans are the carrot, and cramdown is supposed to be the stick. The administration in not only dropping the stick, but it’s increasing the carrot part of the plan. Treasury also plans this month to announce it will offer additional financial incentives to servicers to complete short sales, in which a homeowner as a last resort sells his property for less than is owed on the mortgage, and the bank accepts the discount, American Banker reported.

Under the Treasury proposal, servicers will get a $1,000 “success fee” for each short sale they are able to compete, according to American Banker.

The problem with short sales is that they have been notoriously difficult to complete, with complaints growing that banks are deliberately dragging their feet on them. Also, as Mortgage Insider blogger Matthew Padilla explains, a homeowner’s credit still can get stung by a short sale. But Treasury probably is pushing the idea because its loan modification plan clearly isn’t reaching enough troubled homeowners, Padilla said.

All this points to a simpler, quicker, and more effective solution — cramdown. But the administration clearly isn’t willing to go there. Until then, maybe some homeowners will benefit from a short sale. Maybe some more will get their loan modifications. But no doubt many will simply go on to lose their homes — something that might have been prevented by a bankruptcy judge. The administration has the power to push Congress toward cramdown, but has chosen not to. And that’s something to keep in mind each time Treasury or the White House talks about how much the government wants to help homeowners in trouble.