Obama to push banks on mortgages on Money.com

Obama to push banks on mortgages on Money.com

NEW YORK (CNNMoney.com) -- As foreclosure casualties mount, the Obama administration is expected to announce additional steps on Monday to get long-term help for troubled borrowers.

Under the new initiative, the government will provide more resources for borrowers and will partner with organizations to offer homeowners assistance, a Treasury Department spokeswoman said. The plan also calls for increased transparency and accountability on the part of loan servicers.

The administration's move is its latest attempt to jumpstart its $75 billion loan modification plan, which many fear will fall far short of its goal to help up to 4 million delinquent homeowners.

While some 650,000 people have had their mortgage payments temporarily adjusted, only a fraction have received permanent modifications. More comprehensive data should be released soon, but preliminary figures show the extent of the problem.

For example, fewer than 5% of the trial adjustments on loans owned or guaranteed by Freddie Mac were converted to permanent modifications as of Sept. 30, according to the mortgage finance giant.

Looking more broadly, the figures are even lower. As of Sept. 1, only 1.26% of all trial adjustments were made permanent after three months, reported the Congressional Oversight Panel, which monitors the government's use of bailout funds.

Meanwhile, more and more people are falling into foreclosure. The combined percentage of loans in foreclosure or at least one payment past due was 14.4% in the third-quarter, according to the Mortgage Bankers Association. That's the highest the group has ever recorded.

The struggle to score more permanent modifications highlights the depth of the foreclosure problem: Officials are leaning on banks to offer more homeowners trial relief, but the real test will be whether homeowners will receive lasting help.

"No one is really sure why the conversion rate is so low," said Mike Zoller, assistant economist at Moody's Economy.com. "We're concerned these loans will eventually become foreclosures."
The problems mount

Under the president's plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork.

Borrowers that qualify for a long-term modifications can keep making the lower payments for five years. At that point, the interest rate will be set at the rate at the time of the adjustment, or about 5% today.

Loan servicers, however, say they are having trouble getting the necessary documents from borrowers, while homeowners maintain that their financial institutions are repeatedly losing the paperwork.

And once homeowners send in their forms, servicers may find these borrowers don't have enough income or have too much equity or savings to qualify. Or it may just be more profitable for the bank to foreclose on the home than modify the mortgage.

While the foreclosure rate has eased a bit recently, some experts fear foreclosures will start rising again unless more people receive permanent assistance.

"Everyone is going to be shocked at the low conversion rates from trial modifications to permanent modifications," said Guy Cecela, publisher of Inside Mortgage Finance, a trade publication. The president's program "won't result in a significant number of loans being modified and won't put a significant dent in foreclosure rates."

To be sure, the initiative is still in a relatively early stage. The number of trial modifications did not really start ramping up until the fall, after administration officials pushed servicers to get more people into the program.

More recently the administration and servicers have lessened the documentation requirements and even hired firms to go door-to-door to assist borrowers with collecting the necessary paperwork.

Critics, however, say these measures are not enough. The main problem is that the Obama plan does not address the key factor behind the rising foreclosure rate, which is soaring unemployment. The loan modification plan is not designed to help people with little or no income.
Who is getting help?

Announced in February and launched in April, the foreclosure prevention program seeks to put troubled homeowners into mortgages where the monthly payments are no more than 31% of the borrowers' pre-tax income.

Some 650,000 people have been placed in trial modifications, which were originally intended to last three months but recently lengthened to five. To get into the trial period, homeowners only need to meet some basic criteria, including owing less than $729,750 on their mortgage and having monthly payments above 31% of their pre-tax income.

During the trial period, borrowers must send in the documentation needed to verify their income and expenses, including tax returns, pay stubs and bank statements. Homeowners must also be timely with their trial payments to receive long-term adjustments.

At JPMorgan Chase (JPM, Fortune 500), about 92,500 borrowers, or just over half of those in the president's loan modification program, have made more than three payments. But only 26% of those have also submitted all of the required documents.

"We're not sure why we're not getting the documents from people," said Chase Spokesman Tom Kelly, who declined to say how many permanent modifications the bank has completed.

Citigroup (C, Fortune 500), meanwhile, has converted about 1,800 borrowers into permanent modifications, said Sanjiv Das, head of CitiMortgage. The servicer has about 89,000 in trial modifications.

Citi, too, is having trouble with the documents. Often, borrowers send in paperwork that is not complete or has errors, Das said.

But Treasury's recent relaxation of the rules has allowed Citi to ramp up its efforts. In particular, servicers are now able to accept electronic signatures on tax documents instead of having to secure signed forms. As a result, the number of Citi borrowers whose files are complete has soared to 11,000, from 3,500 only three weeks ago.

"It will go up substantially" said Das, who expects Citi to place between 5,000 and 6,000 borrowers in permanent modifications by year's end.

A growing number of servicers are hiring companies to knock on borrowers' doors in hopes of getting the required income and tax statements.

"This will give [borrowers] someone they can talk to who is reliable and knowledgeable so they can turn that trial period into a permanent modification," said Brad German, a spokesman for Freddie Mac (FRE, Fortune 500), which in late September hired a firm to work with servicers to gather the needed documents from homeowners.

Many servicers, including Citi and Chase, are working with such firms. Others have tried other ways to entice borrowers to provide their documents.

Saxon Mortgage Services, which leads the pack with 44% of its eligible delinquent borrowers in trial modifications, has offered homeowners in California and Florida $25 gift cards to come to company-sponsored foreclosure prevention events with paperwork in hand.

Only about 15% of the borrowers took Saxon up on its offer, a spokesman said.


Treasury tightens screws on mortgage firms found on Money.com

NEW YORK (CNNMoney.com) -- Looking to jumpstart its foreclosure prevention plan, the Obama administration announced new steps Monday to pressure loan servicers to help homeowners long term.

Responding to complaints that too many borrowers are stuck in trial adjustments, administration officials said they will now focus more heavily on getting borrowers into permanent modifications. Government swat teams will go to the institutions to see what the holdup is and banks will have to submit progress reports twice a day during December.

"Now it's up to the banks to do their part to covert borrowers to permanent modifications," said Michael Barr, an assistant Treasury secretary. "Servicers to date have not done a good enough job."

Only a tiny percentage of troubled homeowners have received permanent modifications, raising concerns about the effectiveness of the $75 billion effort. Treasury officials will release the first comprehensive look at the conversions next week.

Top loan servicers will be required to report the status of each modification and their plan to reach a decision. Also, these servicers must say how they will communicate decisions to borrowers.

Those failing to meet their obligations could face so-far unspecified penalties and sanctions.

Servicers have been hiring and training more staff and implementing new technology to work with borrowers.

"Servicers recognize the importance of turning trial modifications into permanent situations," said Faith Schwartz, executive director of Hope Now, a coalition of servicers, community groups and mortgage investors working to stem foreclosures.

Treasury officials also urged borrowers to be more diligent in sending in the documents needed to evaluate their applications. Only one-third of homeowners who have made at least three trial payments have submitted all the needed forms, said Phyllis Caldwell, the new head of Treasury's Homeownership Preservation Office. Some 20% have not submitted any paperwork.

To help borrowers through the process, the administration is providing more information on the documents they need to submit to be considered for a permanent modification. Federal, state and local officials will increase outreach to delinquent homeowners.
Stuck in trial modifications

A growing number of borrowers are complaining that they are not receiving long-term assistance, fueling concerns that the plan will fall far short of its goal to help up to 4 million delinquent homeowners.

Under the president's plan, delinquent borrowers are put into trial modifications for several months to make sure they can handle the new payments and to give them time to submit their financial paperwork. Once the modification becomes permanent, servicers, investors and homeowners are eligible to receive thousands of dollars in incentive payments.

Loan servicers, however, say they are having trouble getting the necessary documents from borrowers, while homeowners maintain that their financial institutions are repeatedly losing the paperwork. Once their files are complete, borrowers may be denied long-term help if they don't meet the program's criteria.

Some 650,000 homeowners are currently in this preliminary phase, receiving payment reductions of about $576 per month, Barr said. About 375,000 people should be eligible to receive long-term relief by year's end.

Preliminary data shows that, as of Sept. 1, only 1,711, or 1.26%, of all trial adjustments were made permanent after three months. These figures come from the Congressional Oversight Panel, which monitors the government's use of bailout funds.

He would hope to see 50,000 to 100,000 people receiving permanent modifications by now, but is concerned the figure will be much lower.

"If we don't see a big increase in the permanent modification numbers, then there's something seriously wrong with this program," said Alan White, a law professor at Valparaiso University. "I can only assume the number is appallingly low."

White said he hopes that next week's report will show that at least 50,000 to 100,000 permanent modifications have been made.
Watching the banks

Increasing oversight of the servicers' modification efforts should help, White said.

This is not the first time the administration has had to twist the screws on servicers. Over the summer, Treasury and Housing department officials called bank executives to Washington, D.C., and told them to ramp up their trial modification efforts.

Treasury in August began publishing monthly reports detailing each institution's progress in putting borrowers into trial adjustments. The idea was to shame servicers who were lagging and officials say they are pleased with the results. Borrowers in trial modifications jumped from 235,000 at the end of July to 650,000 three months later.

"We did see it help dramatically in increasing the number of trial modifications, which was the focus over the summer," Barr said. "We're now going to the next stage, which is to focus the banks' attention on the need to go to permanent modifications."

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