Modifying millions of mortgage loans is proving more difficult than many policymakers anticipated.
When the Obama administration launched its Making Home Affordable plan earlier this year, it pinned its hopes on deputizing and paying loan servicers to modify mortgages of troubled borrowers. Fanfare surrounding the announcement suggested millions of homeowners in distress would begin to see quick and meaningful results.
Instead, the pace of loan modifications appears very slow. Recent reports have charted consumers' painful experiences attempting to negotiate labyrinthine call centers and lengthy obstacle courses simply to determine whether they are eligible for a refinance or loan modification from their loan servicers. Last week the Senate Banking Committee devoted a hearing to the problem, where Sen. Christopher Dodd said the lack of progress was "disgraceful" and the committee heard about the challenges of executing this kind of loan program.
Here's the key point: Making loan modifications on any significant scale requires specialized systems as rigorous as those required for underwriting new loans. Servicers are not equipped to handle underwriting on any substantial scale. Consequently, they are flooded with consumer inquires about eligibility, and the essential systems are missing. If underwriting is performed manually or with tools designed for loan servicing, it is a very slow process prone to error.
The fact that crucial underwriting systems are missing is reflected in three problems that emerged at the recent Senate hearing and that would not occur if proper systems were in place:
First, servicers are reporting herculean efforts to teach new call center employees how to determine a consumer's eligibility for each of the many modification and refinance options, which option to offer and if a new loan is affordable. Second, government oversight agencies are struggling to find a way to audit a sample of loan modification requests processed by servicers using manual processes in call centers.
Third, counseling agencies, with thousands of well-trained counselors to help consumers find solutions, frequently find their efforts squandered because the servicer must re-collect consumer data, restart discussions and take the consumer through its own models, which often leads to long delays and a different decision about borrower eligibility.
Despite these problems, the administration's plan is, in fact, thoughtful and could work. It is missing only some essential ingredients for successful execution. Most important, it needs a way to provide consumers with reliable and systematic decisions on eligibility for the many loan workout and refinance options. This point was clearly echoed in the Senate hearing by testimony from a housing counseling agency in Connecticut.
To jump-start the program to life, the administration should take a leadership role to get this done. This is how it would work:
- Counseling agencies (and loan servicers, if they choose) could equip their call centers with information-gathering tools provided by the system, such as gathering income and expenses.
- The system could gather information for automated fraud detection, income verification and credit analysis from third-party sources,
- The system would automatically determine which programs the borrower is likely eligible for and the terms and conditions for each. Results would be presented to the counselor for presentation to the consumer. The system would apply the complicated calculations such as Net Present Value in an instant and reliable manner.
- After working with the counselor, if the consumer appears eligible for a workout, the baton could be passed to the servicer along with loan information. Since the initial decision could be made with the servicer's own rules, there is much greater coordination.
- Payments from the Making Home Affordable program would be payable only if the servicer acts on the prepackaged workout within defined time limits, thus making the program more efficient and targeted.
- All data collected and decisions made would be auditable and available to oversight agencies. This will also enable fine-tuning of rules and policies to meet market needs.
Servicers have never been in the business of underwriting new loans or loan modifications on any substantial scale. For this program to be successful in months, not years, access to a specialized system is essential for the teams of counselors on the front lines with consumers. All the capabilities I have described exist, and a useful solution could be implemented quickly. Determining consumer eligibility systematically would pave the way for more loan modifications and a meaningful reduction in foreclosures.
