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The top four holders of second mortgages are now on board, but a government program to modify such loans in tandem with first liens will not be up and running for five months.
March 25
WASHINGTON — Responding to lawmaker arguments that an Obama administration program to prevent foreclosures is a failure, a top Treasury Department official announced small changes to it and said a broader overhaul would come soon.
Herb Allison, the Treasury's assistant secretary for financial stability, hinted Thursday that the Home Affordable Modification Program may soon encourage lenders to focus on forgiving principal, instead of just reducing payments.
"What we've been considering is, could we make changes to our program as we learn about it and as the nature of the crisis has shifted from subprime loans to more underwater mortgages and unemployed people?" Allison said at a House Oversight and Government Reform Committee hearing.
"We want to have more people eligible for the program."
An announcement may come as early as today, when the White House is scheduled to hold a press briefing with Allison to discuss an update on housing policy.
The Treasury released guidance Wednesday that made minor changes in the program in an attempt to boost outreach efforts to borrowers and prevent lenders from acting to foreclosure while they also offer trial loan modifications.
Under the changes, lenders are prohibited from foreclosing on any home whose mortgage is potentially eligible for modification through Hamp. If a borrower is later found ineligible, the lender may not begin foreclosure for another 30 days.
But lawmakers from both parties pushed for broader changes.
"This program is death by a thousand cuts," said Rep. Jackie Speier, D-Calif. "It has failed. It has failed miserably. And we are incapable of saying this was an experiment and it didn't work. Let's try something else."
Rep. Darrell Issa, the lead Republican on the panel said the program was a promise that "is not being kept."
"We need to make a change," he said.
Some Republicans suggested completely scrapping the program, but Democrats said the problem was a lack of consistent treatment by servicers and no plan for underwater mortgages.
"We really haven't seen any bold new initiatives coming out of Treasury to address the underlying problem of underwater mortgages," said Rep. Dennis Kucinich, D-Ohio.
Most Democrats and consumer advocates are pushing the program to require lenders to offer principal reductions rather than cutting interest rates or finding other ways to reduce payments. At issue are borrowers whose mortgage balance exceeds the value of their home — a situation that stimulates defaults as some people conclude it is better to walk away from the home than continue making payments.
The push for principal reductions got a boost Wednesday when Bank of America Corp. announced it would write down the values of up to 45,000 loans it acquired with Countrywide Financial Corp.
Many policymakers praised B of A's move, which came as part of a settlement with the Massachusetts attorney general.
"Bank of America should be congratulated for leading the way with this innovative proposal," said committee Chairman Edolphus Towns. "We'll be looking for ways to expand this approach and to include other banks."
Allison said he, too, was encouraged by Bank of America's action.
"There is nothing that prevents banks from writing down principal, and I'm glad finally one of these banks has taken the lead in doing this, and hopefully others are going to follow," Allison said. "There needs to be public pressure, and more people should ask the banks why they haven't done this a long time ago."
At a House Financial Services Committee hearing, Federal Reserve Chairman Ben Bernanke also urged banks to follow B of A's lead.
"The industry was very reluctant to use principal reduction for a long time, and I'm glad to see that they're opening now the idea of using that as one tool to address foreclosures," he said.
Bernanke said banks should participate in any future program set up by the Treasury to encourage principal forgiveness.
"I know that [the Treasury is] looking at alternative ways of addressing foreclosures through principal reduction, through assisting unemployed homeowners and so on," Bernanke said. "And as they develop these programs, then we would certainly encourage banks, particularly the large servicing banks, to fully participate in those programs."
The hearings came the same day that regulators released data showing more trial modifications under Hamp had become permanent.
More than 21,000 trial modifications were converted to permanent status under Hamp during the fourth quarter — a gigantic increase from the 781 conversions in the third quarter, according to a report by the Office of the Comptroller of the Currency and Office of Thrift Supervision.
Still, redefaults on modified loans remained high. More than half of loan mods were more than 60 days overdue at Dec. 31, 2009, and nearly 61% of third-quarter 2008 modifications were 12 months delinquent.
