WASHINGTON — Conceding that its initial mortgage relief program has been less than successful, the Treasury Department Thursday announced new rules to simplify and speed the decision-making process for struggling borrowers trying to modify the terms of their distressed mortgages.
The changes to last year's Home Affordable Modification Program announced by the Treasury take effect on June 1, and are designed to address the continuing problem with borrower documentation that's frustrated both homeowners and mortgage servicers, who act as bill collectors for investors that own pools of U.S. home loans.
The new HAMP requirements will force servicers to have in hand all the needed documents from borrowers before they extend a three-month trial modification. Currently, trial modifications can begin after authorization by phone, with related paperwork only needed sometime within the three-month trial period.
Servicers complain that borrowers often provide incomplete applications or lack sufficient proof of income, and that lack of up-front documentation provides false hopes that a workout is coming.
Borrowers counter that servicers routinely lose their paperwork and then use the lost paperwork as a reason to refuse to modify a mortgage and help them stay in their homes.
The confusion has led to a slow start for the administration's effort, which began picking up speed in December. Several million homeowners may qualify for loan modifications, but as of December, only 110,000 permanent modifications had taken place, a fraction of the 3 million to 4 million sought by 2012.
"We've learned a lot along the way," said Assistant Treasury Secretary Herb Allison, acknowledging that the program to help struggling borrowers stay out of foreclosure got off to a difficult start.
By getting the paperwork to servicers before the trial "mod" process begins, borrowers are likely to benefit, because once a HAMP trial begins, they're guaranteed a permanent modification as long as they make the three trial payments on time. Right now, many are turned down even after making three trial payments.
"It's clear they were having problems taking the initial mods and making them into permanent, sustainable mod, so something clearly needed to change," said Evan Fuguet, senior policy counsel for the Center for Responsible Lending, a consumer advocacy organization in Durham, N.C.
The administration plan seeks to lower payments for troubled borrowers to 31 percent of before-tax income for five years, after which the interest rate on the mortgage begins rising. More than 900,000 trial modifications were offered through December, and to date some 43.2 percent of the permanent modifications have involved extending loan terms, many of them stretching the life of a loan to 40 years.
A year after President Barack Obama announced his plan to help slow the torrid pace of foreclosures nationwide, fixing the problem is proving to be a lot more difficult than anticipated.
Obama had hoped to help 3 million to 4 million homeowners, but that's become an uphill battle amid a recession that's thrown many more Americans out of work, left them behind on their mortgage payments and depressed the value of their homes. A special Oversight Panel created by Congress to oversee the spending of taxpayer bailout money concluded late last year that the HAMP is likely to be swamped by soaring mortgage delinquencies.
There's also the problem of falling home prices. Moody's Economy.com recently projected that home prices may drop another 11 percent in 2010, leading to a peak-to-trough decline of about 37 percent in many hard-hit communities.
Falling home prices have left millions of homeowners making mortgage payments on properties worth substantially less than their outstanding loan balances. These are referred to as underwater mortgages, and Federal Deposit Insurance Corp. Chairwoman Sheila Bair has repeatedly called, with little success, for programs that forgive portions of loan balances, a process called forbearance. Many homeowners are simply walking away from underwater mortgages.
Allison acknowledged that while current programs do allow for forbearance, there's been little loan forgiveness by lenders, and underwater mortgages remain a daunting challenge.
"That is a serious policy concern. There are no simple solutions here. There are issues like moral hazard and basic fairness . . . but I can assure you the administration continues to look at this problem," Allison said, adding that "we haven't yet found a way of dealing with this that would be practical on a large scale."
President Barack Obama favors allowing bankruptcy judges rework loan terms as one means of addressing distressed mortgages, but Congress — and banks — have been unwilling to go along with this change.
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