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U.S. steps up pressure on lenders to modify more mortgages
Treasury threatens public shame and monetary penalties

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.

In some cases, a borrower qualifies for a trial modification, only to face a job loss or pay cut that makes it difficult for him to keep up with his payments, he said. In other situations, borrowers overstate their income to qualify and then struggle to maintain the payments, he said. "How can you penalize a servicer when they don't have control over that," Courson said.

According to the latest government data, J.P. Morgan Chase had modified about 139,000 loans under the program by the end of October. But the company notes that while 92,000 borrowers have made the initial three payments required under the trial program, only 26 percent have submitted enough documentation to move into the permanent phase. Citigroup has modified 89,000 loans under the program. But only 1,600 have made their way to a permanent modification.

Lenders have been working hard on the program, said John Dalton, president of the housing policy group of the Financial Services Roundtable. The administration, for example, set a goal of completing 500,000 trial modifications by Nov. 1, which lenders met early and surpassed, he said.

"It's a complex program, and we're making real progress," he said. "We have 650,000 people in the pipeline now, and we think a high percentage of those will end up in permanent modifications."

Lack of documentation

Part of the problem, government officials acknowledged, is that many borrowers have not turned in all the documents needed to prove they qualify. About 375,000 borrowers should be eligible to move into a permanent modification by the end of the year, but 20 percent have provided no documentation, for example.

"These homeowners must take action, or they could jeopardize their eligibility for permanent Home Affordable Modification," said Phyllis Caldwell, head of Treasury Department's homeownership preservation office.

But housing advocates have complained that even after submitting documents, it has been impossible for some homeowners to make their way through the program.

"This is a frustrating situation for homeowners who were told if they made three payments, they would get a permanent modification, but four or five months later, it hasn't come through," said Alan White, a law professor at Valparaiso University. "I think it's appropriate for Treasury to insist [lenders do more] and to back that insistence with sanctions."

Some lenders are already working to close the gap. Bank of America hired nonprofit groups in Chicago to go door-to-door to assist borrowers with their paperwork. Freddie Mac hired Titanium earlier this year for a similar effort, and since September, the South Carolina firm has reached more than 80,000 borrowers on Freddie's behalf, helping many fill out their final paperwork, said Michael Radesky, the company's chief operating officer.

"Sometimes it's just confusion. [The borrower says] 'I didn't understand the package.' It is fairly complicated," he said. "Having someone show up and explain the process is fairly helpful."

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