In March, the Obama administration began an antiforeclosure effort that offers lenders up to $75 billion in incentives to modify troubled mortgages. If that sounds like a lot of money, it is. But so far, it has not been enough to persuade the mortgage industry to do what is needed to help Americans stay in their homes and keep the economy from falling into deeper trouble.
The first report on the program, released last week by the Treasury Department, shows that as of the end of July, 235,247 mortgages had been modified on a trial basis. That is not even 9 percent of the 2.7 million troubled loans currently deemed eligible. (During the trials, borrowers are granted reduced monthly payments. After they pay on time for three consecutive months, the lowered payment will be fixed for at least five years.)
The report also shows that 117,295 trial-plan offers were pending at the end of July, but it is unclear how many of those will ultimately result in reworked loans.
Why aren’t the banks snapping up the incentives?
Some may prefer foreclosure because it allows them to delay reporting a loss. A delay is especially valuable for banks with other loans that are going bad, say, on commercial real estate. Modifications also require much more time and effort than processing foreclosures. For some mortgage firms that collect payments and handle defaults, the incentives may be outweighed by the fees they collect on delinquencies and foreclosure sales.
For all that, the administration still maintains that the incentives will overcome the industry’s manifest reluctance. It also seems to believe that by exposing lenders’ slow progress, it can shame them into doing better. As far as we can tell, the industry knows no shame.
Administration officials say that they now expect 500,000 modifications by November. That would be a boost, but likely too little given the size of the problem and the vulnerability of the economy.
According to Moody’s Economy.com, it would take at least one million successful modifications over the next six to 12 months to avoid the worst effects of mass foreclosures, including severe damage to families and communities and — as foreclosures drive prices down — a continuing loss of home equity nationwide.
Unfortunately, there is also no telling at this point how many of the loans that are modified under the Obama plan will stay current, and how many will redefault. What is known is that with unemployment rising, even lowered monthly payments may prove too onerous.
With home prices falling, a better way to avoid redefault would be to forgive principal. In apparent deference to banks that do not want the losses associated with principal reductions, Obama officials have not pressed lenders to adopt that approach.
There is a real danger now that lenders, pushed by the administration, may ramp up the number of loan modifications, but that those may be especially prone to redefault. And there is a danger that the administration will squander valuable time pursuing a solution that proves inadequate, allowing the foreclosure crisis to persist. To guard against those dangers, the administration must provide copious data on the performance of modified loans over time. And it should reveal the assumptions it is using to project the program’s goals.
If the Obama plan does not produce enough successful modifications, Congress must give homeowners an alternative route to relief. The best way to do that is by changing the law to allow bankruptcy judges to modify bad mortgages. The prospect of having to live by a judge’s ruling would be the biggest incentive of all for lenders to modify bad loans, and it would not cost the taxpayers anything.
