We've written several posts on this site in recent weeks about the Making Homes Affordable program. The program was originally intended to help stem the tide of foreclosures that we're seeing right now, and to help our ailing real estate markets. The program aimed to do this by helping homeowners with high interest rates to refinance into a loan with a lower rates, or to help homeowners that were in risk of foreclosure by modifying their current loans.
Thus far the program hasn't been overly successful. With foreclosure rates on pace to reach 3.5 million foreclosures this year, the fact that the program has only seen 131,030 loan modifications as of July 6th is a bit disappointing. We've seen quite a bit of anecdotal evidence through the commenters on this site, as well as through other news stories that doing a refinance or loan modification through the Making Homes Affordable program isn't as easy as it should be. Banks are throwing up roadblocks, and dragging their feet on implementing the program. More and more homeowners are finding themselves in trouble, and yet the banks don't seem to want to move on these refinances and modifications. But why?
Reasons Why The Making Homes Affordable Program Hasn't Done Very Well
When you get down to it, there are quite a few reasons why the program hasn't really taken off.
- Banks don't have enough resources: Traditionally the mortgage servicers have done relatively easy tasks of collecting payments and escrow funds, and dispersing those payments when needed. Dealing with borrowers who were in arrears typically was never more than 2-3 percent of their business. Now that the banks are being asked to modify thousands upon thousands of loans, often up to 25 percent of their portfolio, they are finding that they're scrambling because they don't have enough resources to handle the influx of requests. They don't have the trained staff, and they just can't handle the sheer volume.
- Mortgage loan modifications require a lot of work: Modifying a loan isn't an easy process as it requires a lot of one-on-one work to underwrite the modified loans – especially when many of these loans weren't properly underwritten in the first place. Also, since the reason a lot of these homeowners need to refinance is because they've lost a job or have other financial difficulties, they have to figure out if the borrower can afford the new payments. Doing all this stuff takes time, and personnel.
- Banks don't see enough incentive to do the loan modifications: Another possible reason that loan mods and refinances aren't being done is that the banks just don't see enough incentive for them to follow through with them. We've seen anecdotal evidence from commenters that it takes months just to get a phone call back, and that the process is un-necessarily tough to navigate. Many banks also believe that if they just wait the borrower out, that they will “self-cure” or get caught up on their payments. Often that is the case. For the ones that don't, the banks realize that the default rate for those that have modified their loan is still upwards of 50%, so they often believe that following through on the loan mods isn't worth their time and effort.
- Not doing loan modifications makes the banks balance sheets appear healthier than they are: Many banks are avoiding doing the loan mods and refinances because it makes their balance sheets appear healthier. While it's true that foreclosures will ultimately be more costly to the banks than loan modifications would be, they can often push the foreclosure process out to 18 months or more, and in the meantime they can keep the loans on their books at an inflated value. A lot of them would rather do that then a bunch of loan modifications.
- $1000 government incentive to the banks is next to meaningless: Some experts have said that the $1000 per modification incentive that the government is dangling in front of the banks is next to meaningless because of the costs the banks would have to incur due to the thousands upon thousands of loan modifications. The time, effort and costs involved in doing these loan mods is astronomical.
It's pretty obvious from the statistics that the program really hasn't done very much to help the foreclosure crisis thus far. So what can be done about that?
Government Plans To Get Things Moving
The government realizes that the program hasn't helped very much so far, and now they're looking to jumpstart things by moving from giving incentives, to doing more of the punishments for not following through. This past week the Obama administration sent out letters to representatives from the top 25 mortgage servicers asking them to assemble in Washington on July 28. At that meeting they plan to talk in depth with the companies about loan modifications, and why more aren't being done. They also plan to demand that more be done to help troubled homeowners.
So now that the carrot hasn’t worked especially well, the government is taking out the stick. That letter the administration sent out on Thursday did not mince words. It demanded that the servicers begin “adding more staff than previous planned, expanding call centers beyond their current size, providing an escalation path for borrowers dissatisfied with the service they have received, bolstering training of representatives, developing extra online tools, and sending out additional mailings to borrowers who may be eligible for the program.”
And the laggards? Starting next month, the government plans to begin publishing data showing which servicers are doing well and which are doing poorly, thus trying to shame them into doing the right thing. And, of course, there is that July 28 meeting, in which all these points will be made, I suspect, rather forcefully.
Apparently, the only incentive left is a good swift kick in the rear.
We'll see if these added steps have the desired effect. At this point, I'm not sure that they will.
What do you think about the Making Homes Affordable program? Why do you think it hasn't been more successful? Have you had an unsuccessful attempt to refinance or modify your loan? Tell us about it in the comments.
More Making Homes Affordable Information
- Making Home Affordable Refinance Program Frequently Asked Questions
- Making Home Affordable Loan Modification Program Frequently Asked Questions
- Update: Modification Program Updated To Cover Second Mortgages
- Loan To Value Restrictions Eased – Up To 125% LTV Allowed Now
- My Experience With The Making Home Affordable Refinance Program