Now that the Obama administration has a plan to help troubled homeowners, will it work?
It's a fair question, because the scope of the crisis is huge and efforts that preceded the Making Home Affordable initiative have largely failed.
The centerpiece of the president's plan is the stipulation that mortgage servicers will be paid to modify the loans of borrowers facing foreclosure. That's new. Increasing incentives should produce more loan modifications and fewer foreclosures.
Everything's OK then, right? Not so fast. The idea of providing incentives to servicers is on target, but the problem, which few policymakers have anticipated, is that servicers do not appear to be equipped to do the job.
It is important to remember that a loan servicer's traditional duty is to collect payments from homeowners and pass those payments on to investors. For many years servicers have operated in the background. In the past, when a homeowner got in trouble with a mortgage, it would be the servicer's task to resolve the situation. More often than not, that meant simply selling the house, recouping the loan balance and then some.
All that has changed. Real estate values have declined in virtually every market in the country. Millions of Americans owe more on their mortgages than their homes are worth. Modifying the loans, if possible, will often be the only way out of the mess.
Today this is the servicer's dilemma: With little experience and know-how on conducting loan workouts on a mass scale, no amount of financial incentives alone will help them execute the Obama plan in the time required to backstop the economy. Without the right tools and retraining, servicers are doomed to toil away unproductively. There is a real possibility that the mortgage industry, and the administration, will be overwhelmed by the sheer load.
The truth is that servicers are using jerry-built "systems" — mostly long and laborious manual procedures with a few primitive tools for the phone representative to use while counseling the borrower — to work out solutions for homeowners. A loan can take weeks to resolve. Figuring out how each possible solution applies can be complicated.
As the process drags on, the homeowners waiting for the cure risk falling further behind. As many as 50% of loan modifications go back into default, according to government reports.
When the time comes — and it will come soon — for federal agencies to examine the program's progress, they will have a very tough time. Servicers will have been scrambling to do their best but will essentially have made it up as they went along. That's a prescription for failure once again, because recreating a paper trail for how they went about helping homeowners will be next to impossible.
Compliance and transparency, two principles that we assume will be followed when billions of tax dollars are on the line, will rely on a record that may not exist. Accountability in this massive program stands a high probability of suffering as a consequence.
Lawmakers who oversee the agencies in charge of the foreclosure response plans should be asking three important questions. How is the federal government assuring that servicers are adequately equipped? What methods are in place to help regulators make certain the program is working properly? Most importantly, what are we doing to make certain homeowners and taxpayers are treated fairly in the process?
The way we measure the results should be formulated today, not months or years from now, when it will be too late.