Mortgage Mod Mess
When the Obama Administration announced its mortgage modification program, we had high hopes. It is supposed to provide a mechanism by which banks voluntarily lower mortgage payments for people whose homes were in jeopardy of foreclosure. We even built a calculator designed to tell you if you’re likely to quality, and if you do, what your approximate monthly payment would be.
Since the plan was announced a few months ago, we’ve all been in a bit of a holding pattern as we wait to see which banks would participate and to what extent.
Related Articles
Well, on Wednesday the New York Times ran a piece that indicates things may not be going as well as we’d hoped with mortgage modification.
They tell the story of Eileen Ulery, a single woman from Arizona who was recently laid off and is in danger of going into foreclosure on her house. She’d heard of the government’s mortgage modification plan and went to their site, MakingHomeAffordable.gov, where she learned that she’d probably qualify. When she contacted her bank, however, the news wasn’t so good.
“The bank did not offer to alter her mortgage. Rather, the bank tried to sell her a new loan with a slightly lower monthly payment while asking her to pay $13,000 toward the principal and a fresh $5,000 in fees,” said the Times article.
Clearly the bank, Countrywide—now owned by Bank of America (Stock Quote: BAC)—is sleazy for trying to get an already cash-strapped woman to fork over $18,000 for a new mortgage, which as it turns out, has an APR higher than her last one. But it’s not particularly surprising. Banks are about making money and in this case, that’s what they are trying to do. Kudos to Ms. Ulery for spotting the rouse and getting the story out.
The real problem here, if this case is any indication, could be that the banks are not sufficiently incentivized to participate in the government’s mortgage modification plan.
Here’s how the plan is supposed to work: Banks agree to lower the interest rates of these mortgages to as little as 2% in order to lower mortgage payments so they’ll be no more than 31% of the debtor’s monthly income. In some cases they would even reduce the principal. Despite the fact that the cost of lowering these rates is split by the government and the banks, if a bank decides to do this, they are agreeing to significantly reduced revenue on a particular loan.
So why might a bank participate? A couple reasons:
- If the payments are too high and debtor defaults on the mortgage, then the bank won’t be getting paid anything. And something is better than nothing.
- The mortgage modification program provides cash incentives for the banks to participate, in an effort to sweeten the deal for them. Lenders and loan servicers will qualify for up to $6,000 per loan.
According to the Department of the Treasury, every loan under consideration for the program must pass something called the "net present value (NPV) test" which is designed to ensure that the mortgage is worth more in modification than in default. We don't, however, know the parameters of that test. Nevertheless, according to Treasury, the test is designed to guarantee that, "approved modifications are always in the best fiscal interest of servicers."
For some banks, like Ms. Ulery’s, it seems that's not the case. They would rather try and squeeze the debtor for more money or, perhaps, let the property lapse into foreclosure and take the loss. But why take the loss?
Whatever the reason, it’s people like Ms. Ulery who are left holding the bag. She can’t sell her house because it’s worth less than she owes and her monthly bills exceed her income (though the Times would have done better to spell out exactly what her monthly mortgage payment is relative to her income, so we could see what it might have been lowered to under the mortgage modification plan).
The administration remains upbeat about Mortgage Modification. The Treasury Department spokesperson we spoke to said that the program was very popular with banks, adding, "Participation in the program isn’t a concern of ours since we have seen overwhelming enthusiasm for the program. In just the few months since the program was launched, we have seen high participation numbers and continue to get more.We are confident that the program will be successfully implemented and, while it admittedly takes time to launch something this big, we’re moving at a great pace."
That's the rub. There are no real numbers yet to guage the success of this program, so we are left wondering whether or not a case like Ms. Ulery's is indicative of an endemic problem, or simply and outlier.
So who are we pointing the finger at here? Well, obviously Countrywide was behaving poorly with regard to Ms. Ulery, but, again, that shouldn’t be a surprise. Countrwide is a bank and this kind of thing is in their nature. The real burden lies with the Obama administration and the administrators of the Mortgage Modification plan. They've enacted a program which looks great on paper and gets struggling homeowners excited, yet it remains to be seen whether or not is has what it takes to compel the banks to participate.
Next: Duck Boat Blues
