Treasury steps up pressure on lenders to modify more mortgages

Homeowners in California seek assistance at an event to help people restructure high-risk loans.
Homeowners in California seek assistance at an event to help people restructure high-risk loans. (Marcio Jose Sanchez/associated Press)

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By Renae Merle
Washington Post Staff Writer
Tuesday, December 1, 2009

The Obama administration on Monday promised tougher scrutiny of lenders participating in its marquee foreclosure-prevention effort and threatened to penalize companies that don't do enough to help struggling homeowners.

The move is aimed at breaking a bottleneck in the Making Home Affordable program, which was launched in March but has been slow to reach many borrowers. Most of the 650,000 homeowners enrolled in the program are stuck in its initial phase and still must prove that they qualify for reduced mortgage payments. Moving those borrowers from trial modifications into permanent ones is a key test of the effort's effectiveness.

Treasury Department officials would not say Monday how many loans have been permanently modified. But a recent report by the Congressional Oversight Panel, which is monitoring the government's Troubled Assets Relief Program, found that only about 1 percent of borrowers had moved from a trial modification into a permanent one.

"In our judgment, servicers, to date, have not done a good enough job of bringing people a permanent modification solution," Assistant Treasury Secretary Michael Barr said during a conference call with reporters.

Under the program, eligible homeowners can have their loans modified to reduce their mortgage payments to 31 percent of their income. To qualify for a permanent modification, borrowers must provide extensive documentation and make three consecutive payments to prove they can afford the new loan.

To prod lenders to move more borrowers into permanent loan modifications, Treasury officials said they would use a combination of public shame and monetary penalties. Lenders' performance will be tracked in report cards that show how many loans have been permanently modified, and teams of officials from the Treasury and Fannie Mae will visit major banks to monitor their progress.

Lenders that fail to perform will be "subject to consequences which could include monetary penalties and sanctions," according to a Treasury statement. Officials declined Monday to detail what those penalties could be. Lenders are not paid under the program until a loan modification is made permanent, and it was unclear what additional recourse the government might have under its contracts with participating companies.

Continued frustration

The announcement, however, failed to satisfy housing advocates, who expressed continued frustration with what they consider slow progress on loan modifications and urged the administration to take more aggressive action.

"The lack of conversion of these loans is at dismal levels, which means the program has been a failure," said John Taylor, president of the National Community Reinvestment Coalition. "The government needs to take the gloves off and do something much more proactive, and I don't think penalizing is enough."

Taylor said the administration should support allowing bankruptcy judges to modify mortgages or use government bailout funds to buy these mortgages from lenders at a discount and then force their modification.

"If you wait for voluntary compliance you're going to get more of what the government is already experiencing, and that's frustration," he said.

Tough economic conditions, including rising unemployment, are making it harder for some borrowers to qualify, said John Courson, president of the Mortgage Bankers Association.


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