Treasury threatens servicers over slow mortgage modifications

Three years after the Great Recession began, home foreclosures continue at a record pace.
Three years after the Great Recession began, home foreclosures continue at a record pace.

WASHINGTON — The Treasury Department announced Monday that it would send financial "SWAT" teams to leading mortgage servicers in December to police their performance in a $75 billion government program that seeks modifications of distressed mortgages in order to reduce the high national rate of foreclosures.

It's an effort to ratchet up pressure on mortgage servicers, who act as bill collectors on behalf of banks that originate mortgages or investors who own bundles of mortgages pooled together as securities.

These servicers have been slow to modify mortgages, the administration charges, despite Treasury Department efforts since February to provide financial incentives to participate in the Home Affordable Modification Program.

"In our judgment, servicers to date have not done a good enough job of giving people a permanent modification," Assistant Treasury Secretary Michael Barr said.

In a conference call, Barr said servicers had extended a large number of trial mortgage modifications, more than 650,000, but had moved too slowly in converting them to new permanent mortgages.

Of the 650,000 trial modifications, about 375,000 could be converted to permanent mortgages in December, Barr said. The trial modifications have saved borrowers an average of $576 per month on mortgage payments, he said.

Halting foreclosures is a matter of urgency if the nation is to recover its economic footing. For home prices to stop falling, mortgage delinquency and foreclosure rates must stabilize and fall. The Mortgage Bankers Association said in early November that one in every seven mortgages was now past due.

The 10.2 percent unemployment rate is throwing millions more Americans into loan delinquency. At least 3 million additional foreclosures are expected in coming years. A special panel that's overseeing the use of taxpayer bailout money concluded in October that the taxpayer-funded mortgage efforts, while laudable, were likely to be swamped by surging foreclosures.

The Obama administration will send "SWAT" teams to keep an eye on the six largest mortgage servicers, who collectively handle about 85 percent of outstanding U.S. mortgages. Participating servicers also will be required to report to the Treasury twice daily on their progress to convert trial modifications to permanent fixes. The failure to boost permanent solutions significantly will trigger consequences, Barr said.

Pressed to detail those consequences, Barr refused, instead repeating that the Treasury wants servicers to step up their efforts and borrowers to do a better job of providing documents to servicers.

Insufficient documentation remains a major hurdle for struggling homeowners, but the problem cuts both ways. For more than two years, McClatchy has sat in on borrowers' phone calls with mortgage servicers. Virtually all the servicers have lost or misplaced documents repeatedly or are unaware of documents that they have in their possession.

Consumer advocates such as the Center for Responsible Lending in Durham, N.C., say that the solution is legislation that would allow bankruptcy judges to modify mortgages if servicers won't.

"The root failure of the current loan-modification program is that it has been voluntary," said the group's spokeswoman Kathleen Day, advocating a revamp of bankruptcy laws. "It's the only way to focus industry's attention."

Treasury's current leverage over mortgage servicers is questionable. Under the program, the government doesn't pay the servicers until a mortgage has been modified permanently, so warning that money will be withheld is an empty threat.

Servicers often collect a wide range of fees when a home goes into foreclosure. These fees can exceed what the servicer would get from participating in Obama's modification program.

"The incentives under the program can be sizable," Barr said, disputing the view that there are better incentives to move to foreclosure. "In general, it is in the servicer's interest to be proceeding (to modification) as expeditiously as possible."

So why aren't servicers moving more quickly?

"I think if you look at the state of the financial services industry, there are enormous competing pressures for time and attention of top management," said Barr, adding that many were slow to commit senior management to foreclosure prevention. "What we are reinforcing today is the importance of doing that."

The Financial Services Roundtable, which represents many servicers or their parent companies, issued a statement Monday that was silent on the administration's allegations.

"The industry remains committed to working with Americans to help them stay in their homes," the statement said.


Recent modification data

Help for homeowners


To ask a question about this story or any economic question, go to McClatchy's economy Q&A

Political clash expected soon over rising U.S. $12 trillion debt

Wall Street's a casino, so maybe state gambling laws apply

Changes: Bank of America sends out simple statements