The Congressional Oversight Panel that keeps track of the TARP has a message for the Administration: The home loan modification program is moving so slowly that it cannot come close to matching the rate at which mortgages fall into default. In its April report, the body said that Home Affordable Modification Program was not working. “Treasury’s response continues to lag well behind the pace of the crisis.” The report added “As of February 2010, only 168,708 homeowners have received final, five-year loan modifications – a small fraction of the 6 million borrowers who are presently 60+ days delinquent on their loans.”
What the report did not address entirely is that the bureaucracy involved with the modification of home loans can spread the process over several months. Some banks are reluctant to modify mortgages because of the loss of late fees that they collect on loans in default. The government has clearly not given the firms adequate incentives to offset the value of those fees. The process to get a mortgage modification is also unwieldy. Homeowners have to fill out reams of forms to quality for the status that gives them temporary modifications. It can then take several months to get them permanent mortgage relief.
The premise of the Administration’s $75 billion program to slow defaults and foreclosures may be flawed at its base. Government statistics show that many people who get modifications re-default later. Data from the Office of the Comptroller of the Currency and the Office of Thrift Supervision show that over half of the revised home loans are in default within a year. Payments that are 30 days late on altered loans given over the twelve months rose to 57% as of the late March report from the two agencies.
The reasons for “re-defaulting” are not entirely clear, but two forces act against the success of the federal program. The first is that the unemployment rate means that some homeowners with improved mortgages lose their jobs and thus their ability to pay. The second is that 11 million homes in the US have underwater mortgages. Many people who believe they will never make money when they sell their houses may simply give up on making monthly payments and move elsewhere.
The Administration is trying to solve the problems of underwater home loans by pressuring banks to actually drop the amount of mortgage principles. That should have the effect of giving homeowners the hope that their homes will have some value in excess of their mortgages. Banks had resisted the plan but Bank of America Corp. (BAC) now backs the idea of allowing bankruptcy judges the right to reduce a mortgage’s principal as does Citigroup Inc. (C).
The federal government may face a problem it cannot solve. The process for modifying any home loan takes months, no matter which program is used. In the meantime, the price of homes continues to fall in many regions. A modified loan may seem like a good deal for mortgage holders, until the value of their house drops sharply again.
Douglas A. McIntyre
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