FreeDIYkits Loan Modification Blog

Nearly a year ago, the Obama administration trumpeted a loan-modification program that was supposed to save millions of mortgage borrowers from foreclosure. That plan–involving monetary incentives for banks and an occasional poke in the eye when they don’t seem sufficiently motivated—isn’t proving a miracle cure. So look for lots of proposals in the months ahead on how to take loan mods to the next level, and the next one after that.

Here’s an idea being pushed by John Taylor, chief executive of the National Community Reinvestment Coalition, which represents local organizations that promote affordable housing and community development. Mr. Taylor wants the U.S. Treasury to buy large numbers of troubled mortgages at a discount to face value and then ease the terms to make them affordable for the borrowers, including in many cases by reducing the principal to something nearer the current value of the home. After it reworks the mortgages into “sustainable” form, the Treasury could then package and sell them to investors, Mr. Taylor says.

He figures the Treasury could start such a program with only a few hundred million dollars and that it should be profitable. Some private firms, such as PennyMac Mortgage Investment Trust, already have similar mortgage-purchase and modification programs, of course. Mr. Taylor says that’s fine but Uncle Sam should get a cut of this action, especially since the government is propping up the entire housing and mortgage market, making it possible for firms like PennyMac to operate.

A Treasury spokeswoman, asked to comment on Mr. Taylor’s proposal, said: “The Administration is always examining new ways to refine existing housing programs, but we have no changes to report at this time.”

One problem with Mr. Taylor’s idea is that the Treasury might not be very good at valuing and modifying home loans. And it might be awkward for the government to be in the position of foreclosing on those borrowers who, it turned out, can’t be saved even with a loan mod. Mr. Taylor says the government could cope with such challenges. For those who can’t keep their homes, he says, there are “graceful” ways to move them out, such as allowing a “short sale” of the home to avoid a foreclosure. (In a short sale, the holder of the mortgage allows the home to be sold for a sum less than the loan balance.)

The Obama administration’s loan-mod campaign–called Home Affordable Modification Program, or HAMP—provides financial incentives for banks and other owners of mortgages to reduce monthly loan payments for borrowers facing the risk of foreclosure. Through November, loan servicers had signed up 728,000 borrowers for trial loan mods; only 31,000 had qualified for a permanent fix. Many borrowers who got a trial mod have been unwilling or unable to provide all the required documents to confirm their financial situation.

“By anyone’s standards, the participation (in HAMP) has been disappointing,” says Mr. Taylor, “so we need a Plan B.”
by: James R. Hagerty

Article Source:Wall Street Journal