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Obama administration steps up pressure on mortgage lenders

Under new requirements to help prevent foreclosures, banks and other mortgage lenders could face fines if they lag in converting temporary home loan modifications into permanent changes by year's end.

December 01, 2009|By Jim Puzzanghera and E. Scott Reckard
  • Under the government's program, more than 650,000 mortgages as of Oct. 30 have been temporarily modified, with an average monthly payment reduction of $576. But to date, few of those three-month trials have become permanent. Above, a home near foreclosure in Miami.
Under the government's program, more than 650,000 mortgages as of… (Joe Raedle / Getty Images )

Reporting from Orange County and Washington — With rising foreclosures still threatening the economy, the Obama administration is trying to pump new life into its much-criticized program to lower payments for homeowners at risk of defaulting on their home loans.

Officials unveiled requirements Monday that would step up government scrutiny and threaten fines on banks and other mortgage lenders should they lag in converting temporary mortgage modifications into permanent changes in loan terms and conditions by the end of the year.

Under the Home Affordable Modification Program, the aim is to reduce monthly mortgage payments for those facing foreclosures to 31% of their monthly income. But many homeowners participating in the program tell horror stories of bureaucratic runarounds in their quest for a permanently lowered mortgage bill.

A trade group for some large mortgage companies acknowledges problems with the complex program and said the industry was working to roll out a universal website to enable people to submit forms and documents online instead of relying on overloaded fax machines.

As part of its newly aggressive action, the administration is summoning executives from the nation's top mortgage servicers to Washington next week to prod them to speed up their efforts.

The effort also involves sending what Treasury Department officials described as three-person "SWAT teams" to the offices of those firms starting Wednesday to help them obtain the necessary documents from borrowers and trouble-shoot problems.

The hope is to shame mortgage servicing companies into doing a better job of making 90-day trial modifications permanent by highlighting those firms that are not performing well and threatening penalties or other sanctions against laggards based on the agreements they signed to participate in the program.

"Servicers that don't meet their obligations under the program are going to suffer the consequences," Assistant Treasury Secretary Michael Barr warned.

The changes also require mortgage lenders and servicers to provide updates to the administration, sometimes twice daily, about each mortgage being modified. Fines and other sanctions could be imposed on those companies that do not meet certain performance obligations.

But housing advocates doubted the tougher stance would work. They said the administration could do little more than kick companies out of the program.

"Shaming people into doing the right thing is very slow, and a lot of people will lose their homes in the meantime," said Diane Thompson, a lawyer with the National Consumer Law Center.

Loan servicers would seem to have an incentive to turn temporary modifications into permanent ones: They receive as much as $3,000 for each modified mortgage that is made permanent. But fees they receive in the foreclosure process could reduce the incentive to modify loans, Thompson said.

She and other advocates favor legislation that allows judges to reduce the principal on a primary residence as part of bankruptcy, a proposal that stalled in Congress this year.

The administration's announcement comes amid complaints from people who have received the short-term reductions in their payments but have been unable to get their servicer to make the changes permanent -- or even make a decision.

The mortgages have been altered under the administration's $75-billion modification program, which uses financial incentives to get banks and other mortgage holders to reduce the payments for homeowners who are unable to make monthly payments and meet other qualifications.

The program has temporarily modified more than 650,000 mortgages as of Oct. 30, with an average monthly payment reduction of $576. But to date, few of those three-month trials have become permanent. At the start of September, only 1,711 trial modifications had become permanent, according to the oversight panel monitoring the $700-billion Troubled Asset Relief Program. TARP money is used to fund the program.

The Treasury Department, for the first time, will release its own data on permanent modifications next week. But Barr said the number was low.

About 375,000 of the trial modifications are eligible to be made permanent by the end of the year. About 37% of those homeowners have submitted the needed documents, including current income statements, so servicers can decide whether to grant those owners permanent modifications, said Phyllis Caldwell, head of the Treasury Department's Homeownership Preservation Office.

"These homeowners who took the time and effort to complete documentation deserve a decision by their servicer," she said. About a fifth of those eligible have not submitted any documents, she said.

Bank of America Corp. has tried to get eligible customers to submit their documentation, spokesman Dan Frahm said.

"Once again this week, Bank of America will notify more than 50,000 of our own customers who have made their trial-period payments that we have not yet received all required documents," he said.

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