The Sisyphean Housing Problem

The administration realizes it'll take more than carrots to get banks to rewrite mortgages for homeowners at risk of foreclosure. On Tuesday, after five months of incentives that got less than desired results, the White House switched to a new tactic -- public shame. A Treasury Department report card called attention to mortgage servicers' milquetoast efforts under a $75 billion loan modification program. And federal lawmakers are threatening mortgage servicers with a whole bundle of sticks if they don't boost the housing market. But shame and the threat of punishment may not be enough. The housing market is still so broken that a lot more than cash is needed to fix billions of dollars worth of broken mortgages left over from the unsustainable housing boom that went bust.

The Obama administration's housing program, unveiled in February, was meant to stem the pace of foreclosures. But the reality is turning out to be more Sisyphean. There were more than 1.5 million foreclosures filed in the first half of the year, according to RealtyTrac and there may be close to as many as that in the second half, more than three times the normal average.

As lawmakers are learning, things get ugly trying to revive a market that had been fueled by the false assumption that house prices would always rise. Millions of home owners are underwater in their mortgages, meaning that the value of the mortgage is greater than what the house is worth. In that situation, there's little incentive to keep paying the mortgage servicer, and there are limited options for helping these homeowners until housing prices recover, which won't be anytime soon.

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Mortgage servicers are about halfway to meeting the administration's goal of modifying 500,000 mortgages by Nov. 1. But they're years away from hitting the eventual finish line of 4 million modifications. To push things along, Treasury officials are starting to exert more pressure on mortgage servicers. For example, Freddie Mac, one of the nation's largest servicers, will start auditing applications of turned down borrowers to ensure banks have legitimate reasons for rejecting loan applications. Congress is also getting irate with lenders' slow progress on loan modifications, and lawmakers have even threatened to revive proposed legislation that would allow bankruptcy judges to modify mortgages.

Meanwhile, Treasury still needs to sort out many of the details of the plan, such as working out a process to modify Federal Home Administration loans as well as a way to persuade investors to remove second liens on homes. The Treasury Dept. is learning that it's not enough to pay banks to modify mortgages. Under President Obama's plan, servicers get money if a borrower stays current on a loan, up to $4,500 over three years. The problem is that servicers also charge fees for delinquent loans, which makes them a tidy source of revenue. Talk about a Catch-22.

Even if mortgage servicers want to modify mortgages, they face severe staffing and training shortages. The Mortgage Bankers Association says one of its members has hired 8,000 staffers, spending $40 million on mortgage modification efforts. Bank of America says it nearly doubled staff in this area and now has 7,500 people dedicated to helping customers make mortgage payments. Yet, according to Treasury's report card released Tuesday, Bank of America has modified just 4% of the 60-day delinquent mortgages in its portfolio.

Complicating complex matters further is the fact that unemployment will continue to rise. When people lose their primary source of income, there is little that any bank can do to ensure that homeowners continue to make payments on their mortgages. That problem nudges up the redefault rate for modified mortgages, which even the rosiest predictions peg at about 50%. That means that even if Treasury and Congress succeed in boosting the number of loan modifications, about half of the mortgage servicers and the homeowners will be back to Square One next year, once again facing foreclosure.