Banks Contradict Themselves on Why Loan Modifications Aren’t Working
CNN examines the stalled efforts to rework troubled mortgages, noting that only 6 percent of 4 million eligible homeowners have been helped so far under the Obama administration’s Making Home Affordable program. The piece notes that banks say they are trying to do loan modifications, but need more time to get up to speed on the program. Housing advocates say banks need to be forced to do loan modifications because a voluntary program just won’t work.
Critics say that the program works against the banks’ best interests, as the homeowners who most need the program are the riskiest bets.
“If the borrower is really in trouble, [the lenders] probably don’t want to do the modification, because they think there’s a good chance the borrower will redefault, and they will do a lot of work and they won’t collect money,” said Paul Willen, an economist with the Boston Federal Reserve who has studied bank foreclosures and modifications.
“The problem with this is in some deep sense, you can’t penalize the banks for acting in self-interest. It’s a for-profit business.”
But via Calculated Risk, Diana Olick at CNBC gives Bank of America’s view — that it’s holding off on foreclosures in order to modify loans.
Foreclosure sales have been abnormally low since we learned of the pending implementation of the administration’s Making Home Affordable program. From that point, we delayed the initiation of foreclosure proceedings and sales for customers that may eligible for a loan modification under MHA. As a result of this policy, our foreclosure sales in recent months have been as little as half the normal pace we experienced before.
So … which is it? Banks are either refusing to modify loans because they’ll end up losing money on borrowers who will only re-default, or they’re holding off on foreclosing in order to help borrowers who might qualify for a modification. But they can’t be doing both at the same time.
So why are loan modifications really stalled? It looks like the only correct answer might be that we clearly don’t know. The CNN report, however, does include a tidbit that give a little more insight into the problem:
Multiple administration officials insist to CNN that there is adequate oversight of the program and that the Treasury Department has enlisted Freddie Mac to monitor the banks.
A Freddie Mac official, who would speak only on the condition of anonymity because it is acting “at the direction of Treasury,” told CNN that its investigators visit banks, but only after giving the banks’ management notice that they’re coming.
The agency reviews loan documents, but only those that lenders provide. There are no surprise visits, no tape recordings of bank calls to assure quality assurance, and no way to respond to individual homeowner complaints.
So let me amend my earlier statement. We don’t really know why loan modifications aren’t working — and we’re not really trying o figure out why, either.