Source : Business Times – 2 Dec 2009
The Obama administration on Monday promised tougher scrutiny of lenders participating in its marquee foreclosure prevention effort and threatened to penalise companies that don’t do enough to help struggling homeowners.
The move is aimed at breaking a bottleneck in the Making Home Affordable programme, which was launched in March but has been slow to reach many borrowers.
Most of the 650,000 homeowners enrolled in the programme 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 on 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 (TARP), found that only about one per cent 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 in a conference call with reporters.
Under the programme, eligible homeowners can have their loans modified to reduce their mortgage payments to 31 per cent 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 on Monday to detail what those penalties could be.
Lenders are not paid under the programme until a loan modification is made permanent, and it was unclear what additional recourse the government might have under its contracts with participating companies.
The announcement, however, failed to satisfy housing advocates.
‘The lack of conversion of these loans is at dismal levels, which means the programme 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 penalising is enough.’
Mr 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.
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