Plan to Fix Home Loans Fixed -- Again
Whether you’re more into baseball or cleaning closets, spring is a good time for a fresh start. But when it comes to the Treasury Department, it seems that the best officials can do is another hopeless makeover of doomed home foreclosure relief efforts. Last week, just days after the release of a scathing rebuke of its loan modification program from the overseer of the Troubled Asset Relief Program (TARP), the administration said it was making changes to improve the plan. But even with the new measures, the program will hardly make a dent in the ever mounting number of foreclosures.
The administration’s mortgage plan appears well intentioned, with the aim of providing short-term relief for unemployed borrowers, more incentives to encourage banks to write down loan balances rather than interest payments, and money for investors who release their hold on second liens. It’s hard to argue with the idea of helping homeowners stung by job losses and crashing home prices, especially when their pain tends to spread to the housing market in general, hurting all homeowners.
But the administration’s plan was poorly designed from the start. It quickly pushed borrowers into temporary modifications before lenders could even verify their paperwork. Eventually these borrowers were to be shifted to a more “permanent” mode, although the new loan terms last only five years. Banks were given scant reason to help borrowers, and many loan servicers were simply too overwhelmed to be of much assistance. After all, loan modifications are best done on a one-on-one basis, with servicers taking a close look at each borrower’s particular situation.
So it’s no surprise that the result of the effort has been “disappointing,” says TARP’s overseer. Through February, there were only 168,708 permanent modifications out of the more than 1 million trial modifications. And almost 3 million home foreclosures were filed in 2009, according to RealtyTrac, which collects such data. More than 300,000 homes went into foreclosure this past February alone. Because foreclosures occur months after borrowers start having problems, they will continue to grow even as the economy improves.
Housing expert Edward Pinto worries that the administration’s program could wind up do more harm than good by “dragging out rather than addressing foreclosures.” Even the Treasury Department estimates that about 40% of the loans modified -- both temporarily and permanently -- will eventually go into default again, and that’s a conservative estimate. Pinto, formerly chief credit officer at Fannie Mae, says the latest changes layer on additional complexity, clogging the foreclosure pipeline with more loan modifications that will never work out. Many borrowers are simply in loans they can’t afford even with the reduced payments. At least one research group, Amherst Securities, suggests that the program could actually encourage borrowers to default to postpone foreclosures.
For now the administration seems to be buying time. This season is already a loss, but the hope is that recovering home prices and a better jobs picture will keep many borrowers from walking away from their modified mortgages. And, as they say in baseball, there’s always next year.