If servicers appear to be failing in their implementation of the Obama administration's loan-modification program, it may be for good reason: Reunderwriting hundreds of thousands of borrowers who got low- or no-documentation mortgages just takes time.
Some say that's not a bad thing, as the extra verification steps this go-round will only help the mods to stick, reducing fraud along the way. "This is all about putting evidence together to support or deny a loan. We have to stop making bad loans and we can't make 'no-doc, low-doc' mods," said Jay Meadows, the chief executive of Rapid Reporting Verification Co. LP, of Fort Worth.
Servicers methodically gathering documents, collecting signatures and, in particular, verifying income, may be slow to produce results, but not taking these precautions could result in modified loans that redefault, observers say.
"The verification process is at the root of getting an acceptable pull-through rate, which is the be-all and end-all of why we're doing this," said Bill Garland, a senior vice president at Fiserv Home Retention Solutions, a unit of Fiserv Inc. in Brookfield, Wis., hired by Fannie Mae to assist servicers in collecting information from borrowers. "It's a more permanent fix."
The tortoise-over-the-hare approach also allows servicers to address an increased threat of fraud that comes with the Home Affordable Modification Program. "The best time to steal from a store is when the shopkeeper is busy and you can stick stuff in your pockets," said Meadows. Putting customers through a series of verification steps, while time-consuming, is preventive medicine, experts say.
"We've elected to basically require that and get that done up-front, so you do not end up with the problem whereby you give someone a Hamp modification based on a verbal and then they don't provide information that's equivalent," said William Erbey, the chairman and CEO of Ocwen Financial Corp., a servicer of subprime mortgages, said on a conference call last week. "That becomes a difficult situation further on down the line."
Ocwen trailed most other servicers in the report card on the program that the Treasury Department released last week. Only 6% of the West Palm Beach, Fla., company's eligible loans had begun a trial modification at the end of July, compared to 9% for all participating companies and 25% for Morgan Stanley's Saxon Mortgage, the leader of the pack. But Ocwen said it was taking the time to verify income before modifying loans.
Peter Pollini, a principal of the consumer finance group at PricewaterhouseCoopers, said the program "adds a layer of complexity" for servicers that never had to make credit decisions before.
"There's a balance between having more stringent requirements and the servicers' ability to execute," Pollini said. "This industry will continue to be targeted for fraud, and whether it's on the front end on origination or the back end on servicing, there will constantly be a game of catch-up of new schemes."
In addition to the risk of fraud from borrowers who want lower mortgage payments, servicers recognize that investors also may come back and ask them to repurchase loans that were modified in a way that did not adhere to investor requirements, he said.
Garland said any attempt by investors to force buybacks onto servicers could "basically shut the program down." But he said investors would be more likely to make servicers reunderwrite the loan yet again.
Not all servicers want to play the tortoise. Erbey claimed some of his rivals are accepting verbal verification and still granting mods. Others, like Citigroup Inc., are asking the government to ease income verification requirements.
The danger is that doing so could effectively return to the days of stated-income loans, when lenders did not require verification of the income the borrower stated on their application. Stated income loans, widespread from 2003 to 2008, were a contributing factor to the housing bubble.
As Treasury assesses whether to ease verification requirements, one area that most servicers are struggling with is obtaining an additional signature from borrowers who filed tax returns electronically. "You have to ask whether the documents are really providing additional support to the decision," Garland said. "The program is there. The money is there. We're all just tied up in paperwork."
He also noted that some borrowers are being asked to submit documents — without a loan officer's aid — that were not required at origination. "Many of these loans were no-doc, low-doc loans to begin with, so we're holding the borrower to a more onerous qualification than they had originally."
But Meadows said that without the extra layers, "we're falling into the same trap that got us into this problem in the first place."