Sustainable Mortgage Modifications

Report from Andrew Jakabovics recommends setting clear benchmarks to measure progress and identifies possible next steps to contain the foreclosure crisis.

In keeping with the Obama administration’s belief in transparency and accountability, reporting requirements and benchmarks in its Home Affordable Mortgage Program should be established in short order. (iStockphoto)
In keeping with the Obama administration’s belief in transparency and accountability, reporting requirements and benchmarks in its Home Affordable Mortgage Program should be established in short order. (iStockphoto)

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What a difference seven weeks makes. The Obama administration’s quick move to implement a broad-reaching government program to combat home mortgage foreclosures for creditworthy at-risk borrowers in order to protect communities from further decay stands in sharp contrast to the ineffective approach taken by the Bush administration for close to two years as our economy sank into recession.

Moving beyond the Bush era’s industry-led approach to loan modifications known as the Hope Now Alliance, which resulted in few substantive or sustainable modifications, the Obama administration’s Making Home Affordable program sets out clear guidelines and calculations for participating mortgage service companies to modify mortgages in order help worthy homeowners stay in their homes. The plan is based on the simple truth that foreclosures are costly for nearly all involved: homeowners, mortgage lenders and investors, and communities across the country.

The beauty of the program is that it requires mortgage service companies to do what is in the best interest of their customers—lenders and investors—by requiring them to offer modifications in a consistent manner on all loans for which they are responsible when modification maximizes the net present value of a mortgage compared to foreclosure. The program, in short, aligns the interests of borrowers, lenders and investors when foreclosure is clearly not preferable to loan modifications for any of them, and helps stabilize housing prices in communities nationwide.

Success, however, is not guaranteed, which is why the Obama administration and Congress must put in place appropriate tools to measure progress towards those goals. Both the Bush administration’s weak efforts and the more serious but as yet unsuccessful attempt initiated by Congress under the Hope for Homeowners program—enacted in July 2008 but with little to boast about to date—serve as reminders that it is not entirely predictable how such a large and diverse market involving many different financial institutions and millions of borrowers in a variety of circumstances will respond to a program encouraging modifications.

The Making Home Affordable program is thoughtfully designed and has every prospect of succeeding, but constant evaluation should be built into the program from the beginning so that if it isn’t working—or even if some aspects are and some are not—then we will know these things quickly and can take corrective action. As the program gets underway, now is the critical time to establish clear reporting requirements and benchmarks for mortgage service companies to meet.

Moreover, if regular, ongoing evaluations of participating mortgage servicers indicate they are failing to meet expectations for the number of modifications made on non-Fannie Mae or non-Freddie Mac mortgages under program guidelines, then the government should consider taking additional action to modify loans. These next steps are not without controversy, but as we will argue in this presentation, they deserve serious consideration if the benchmarks for individual servicers or the program as a whole are not met.

The program is predicted to provide 3 million to 4 million homeowners with mortgage modifications over the next two years. Working off the low end of that range, it seems reasonable to set a performance benchmark for the program based on that anticipated level of modification activity of 750,000 modifications within six months. Or calculated another way, mortgage servicers should be expected to modify 25 percent of their troubled portfolios in the same time frame. Because we do not have the luxury of waiting before evaluating the new program’s success or failure—absent a concerted effort to modify loans, an estimated 9 million families will lose their homes over the next four years—the Obama administration needs to measure itself against basic metrics for success both for individual mortgage servicers and the program as a whole.

The metrics detailed in this paper should be established within the next three months, in keeping with the Obama administration’s commitment to efficient and effective use of taxpayer resources. Congress should take additional actions now, well in advance of the six-month evaluation date, to provide the administration with the authority necessary to implement the suggested next steps should it become clear that the mortgage-modification benchmarks are not being met, either by the program as a whole or by servicers individually. We will also argue these points in the pages that follow.

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