RELEASE: Andrew Jakabovics on Modifying the Loan Modification Process
There is mounting evidence that mortgage servicing companies participating in the Home Affordable Modification Program are failing to meet their obligations under the program. Borrowers and the Treasury Department are increasingly frustrated by HAMP’s poor results, and it is time to make some significant changes to the mechanics of the program.
Today’s announced “Mortgage Modification Conversion Drive”—a new effort within HAMP to convert the trial modifications offered when a borrower first requests help into permanent changes to the loan terms—highlights the problems borrowers are having in getting permanent resolutions. Servicers have offered more than 650,000 trial modifications under HAMP, but the Congressional Oversight Panel found that fewer than one-half of 1 percent had become permanent as of the beginning of September. Treasury’s new initiative finally includes possible monetary penalties and sanctions for servicers that fail to meet performance obligations, but the new push is heavily reliant on better outreach to borrowers instead of focusing on where the breakdowns and bottlenecks are occurring within each servicer.
Instead of continuing to rely on servicers to process modification requests, Treasury should leverage (and pay) housing counselors and other public interest entities to do the HAMP intake and directly offer trial modifications. Servicers would then be given 90 days in which to challenge a modification before it automatically converts to a permanent modification.
There is a basic set of objective criteria that qualify a borrower for HAMP. It is therefore entirely irrelevant who is doing the calculation, as long as it is done correctly. There is no reason why counselors and other entities could not enter into agreements with Treasury to run the HAMP net present value calculation that determines if a borrower is eligible.
Borrowers already often work with housing counselors or attorneys to prepare packages showing eligibility for a mortgage modification under HAMP. They then submit those packages to the servicers—and sometimes resubmit several times over as packages frequently get lost—who then re-input the borrower’s financial information and consider the borrower for a trial modification.
The three-month trial modification period exists, in theory, to give servicers time to verify the documentation and make minor changes based on updated data on property taxes and other fees that determine the monthly payment. HAMP sets a borrower’s total monthly payment to equal 31 percent of income; if taxes are higher than initially thought, they reduce the mortgage payment accordingly, keeping the total payment fixed.
Yet in practice, servicers are extending trial modifications far beyond the three months as they request and rerequest documents that were often sent multiple times. One of the highlights of the Mortgage Modification Conversion Drive is that it extends the trial period to “give homeowners more time to submit required information.” But the problem is not that homeowners and their advocates are not sending in completed packages; it’s that servicers are seemingly unable to handle the volume of incoming documentation, preferring to require borrowers to resend information multiple times rather than improve internal workflow. Servicers’ demand for faxed responses and unwillingness to accept documents by email is a significant barrier to program efficiency and effectiveness.
It is time to streamline this process and eliminate the bottleneck that servicers have created by recognizing the de facto HAMP intake that counselors and others are already handling. The Treasury Department should give counselors access to a secure web portal to input a borrower’s data and run the necessary calculations to determine program eligibility as well as the modified terms of the loan. Borrowers would begin making modified payments immediately and servicers would have three months from the date of the application to contest or adjust the terms of the modification. Borrowers are already meeting face-to-face with counselors, so it is easy to share the necessary documentation with the party that would run the numbers under this plan. Counselors would scan in the relevant documents and upload them to the secure website to allow review by the servicer. The trial modification would automatically become permanent if the servicer requests no changes within three months.
Counselors would have to certify their work and would be liable for fraud, but they would also be paid similarly to the servicers’ incentives for doing the work currently being done by—or at least assigned to—the servicers. This would relieve counselors of the burden of needing to resubmit applications and documentation multiple times, which would free them up to help additional homeowners. It would also alleviate much of the financial stress that counseling agencies are suffering, as the current payment structure for counseling sessions, which is entirely separate from HAMP, does not cover costs.
The calculation that determines eligibility for a modification is a complicated mathematical model, but the inputs into the model are relatively straightforward and are consistent across the board for all servicers, with a few minor exceptions. Counselors can pull FICO scores as easily as servicers can, and counselors can pull the property valuation in the same way as servicers do, through automated valuation models that come from one of a small number of vendors.
Some servicers are not actually doing the eligibility analyses in house, anyway. They are inputting all the required data into a spreadsheet and uploading it to Fannie Mae for calculation. There is no reason why counselors should not be able to either send in the same data or, better yet, run the model themselves to be able to give borrowers a timely response—something currently lacking from the program. One significant benefit of a web-based application for counselors is the ability to give a borrower a real-time approval or denial. If approved, the trial period begins with the borrower’s payment. If denied, counselors have an opportunity to discuss alternatives to HAMP with the borrower, including making a separate request for a non-HAMP modification from the servicer.
Not all borrowers currently rely on counselors or public interest attorneys to help them navigate the modification process, and this proposed change to HAMP would not preclude borrowers from requesting help directly from servicers. But the ability to streamline the process would likely be attractive to many borrowers. A recent study by the Urban Institute found that borrowers who get counseling are 60 percent more likely to avoid foreclosure or get their monthly payments reduced than borrowers who act alone. Getting more borrowers into the counseling system should be considered a worthy goal in itself.
In short, Treasury must change the program to give counselors direct access to the HAMP model with the authority to modify mortgages on a trial basis and shift the burden of timely response to servicers. Doing so will leave many of the barriers to successful permanent modifications by the wayside.