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Government Modification Program Inadequate, Warren Calls For An Upgrade


October 9th, 2009

 

In the first week of October 2009, U.S. Treasury announced that the mortgage relief plan Making Home Affordable have aided over 500,000 homeowners and is on schedule helping as far as 4 million homeowners avoid foreclosure for the next 3 years.

 

Elizabeth Warren, a Harvard law professor who is chairman of the Congressional oversight panel that oversees the $700 billion financial relief fund set up last year, suggested for Treasury to improve the $50 billion mortgage relief program or develop and adopt new programs.

 

Ms. Warren states that the foreclosure problem has now moved beyond the sub-prime mortgage crisis and now affecting many homeowners and especially low income families. Unemployment is now the giant root of the foreclosure problem. Unfortunately, the current government’s mortgage relief program was not designed to tackle foreclosures as a result of payment option adjustable rate mortgages (ARMs), interest only resets and unemployment.

 

The report suggested that 500,000 modifications may not be enough to put a lid on the proliferating foreclosure crisis and the overall economy. The foreclosure virus is now infecting well behaved borrowers or families who took out conventional, fixed rate mortgages. These are the same responsible folks who put down 10 to 20% on their homes for conventional purchases.

 

The government modification and refinance program was designed to tackle a scenario of problems that existed 6 months ago. Today, we have a whole different picture and unemployment is the main cause of foreclosures. The program needs to be updated to accommodate the unemployment issue.

 

Treasury spokeswoman, Meg Reilly said that the mortgage relief plan is accessible to the unemployed. However they are examining more options to help unemployed homeowners.

 

For many homeowners, it is still a difficult challenge in obtaining a loan modification as many lenders are still reluctant in lowering borrowers’ principal balances. This is of main interest for many borrowers whose homes have fallen by half the value especially in the California, Florida and Nevada regions.

 

Aside from the introduction of the monthly report card assessing the performance of servicers, the Treasury has also proposed additional improvements with the inclusion of standardized forms.

 

By the end of September 2009, 770,000 loan modifications have been extended to homeowners. At the time, this represented about 16% of those eligible for the program or 1 in 4 eligible borrowers.

 

Most of the borrowers enrolled in the program are in a 3 month-trial and as they make their payments on time and return the necessary documents, they will be extended for 5 years.

 

As the government urged several months ago to reach the goal of 500,000 modifications by November 2009, servicers have surpassed this number a month early in October.

 

The next real challenge is to converting these trial modifications into permanent ones. In a tough economy with deteriorating unemployment and the anticipation of the new tidal wave of payment option adjustable rate (ARMs) and interest only resets, it is unclear that 770,000 modifications achieved in September 2009 is enough to wrestle the monster problem ahead of us.

 

 

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