Paperwork Woes Plague Mortgage Plan
The Wall Street Journal
By Ruth Simon And Michael Crittenden
January 17, 2010
Thousands of homeowners participating in the Obama administration's foreclosure-prevention plan could miss a government deadline for completing necessary paperwork, putting them at risk of disqualification.
The program, a cornerstone of President Barack Obama's housing-rescue effort, was launched in February and has been bedeviled by paperwork problems from the start. Many companies have given borrowers modified mortgage terms on a trial basis, based on verbal information, and have struggled to get the documents required to finalize mortgage modifications.
According to data released by the Treasury Department Friday, more than 900,000 borrowers have begun trial modifications under the program, but just 7% of them have received permanent changes so far.
Borrowers must make three trial payments and provide a hardship affidavit and other paperwork to receive a permanent mortgage fix. Many are still in the early stages and aren't at risk of being disqualified. But thousands are at risk.
Wells Fargo & Co. said 10% of its mortgage borrowers who have made the required trial payments under the program haven't provided any documents; another 15% have provided some, but not all the needed paperwork.
The administration last month gave borrowers who were current on their payments after at least three months an extension until Jan. 31 to provide needed paperwork. But the administration doesn't plan to extend that deadline, Assistant Treasury Secretary Michael Barr said Friday.
"We are going to have further guidance for [mortgage] servicers at the end of the month," he said.
It's not clear what will happen to borrowers who have made the required three payments but don't qualify for a permanent fix under the Obama program. Some are likely to receive modifications outside the program from mortgage companies. Others, including those who don't provide any of the necessary paperwork, are likely to wind up losing their homes through a short sale or foreclosure.
The administration has said the mortgage program could help as many as four million borrowers. It provides financial incentives for mortgage companies and investors to reduce loan payments to affordable levels.
Through December, 66,465 borrowers had received permanent fixes; an additional 46,056 modifications have been finalized, but await the borrower's signature. The number of borrowers who have received completed modifications, while low, has more than doubled since November. The Treasury Department announced in December a "conversion drive" designed to increase permanent fixes.
Administration officials are also considering new ways to fight foreclosures, particularly for the unemployed. The Treasury Department and other policy makers have not settled on a specific plan, but ideas being considered include finding a way to help borrowers who have lost their jobs to reduce the principal on their loans, according to people familiar with the matter. The administration's annual budget proposal could be a vehicle for such a plan.
A Treasury Department spokeswoman declined to comment on possible changes in the program, but Mr. Barr acknowledged that the administration is continually reviewing its efforts to deal with foreclosures.
Calls for change have increased as a weak economy continues to drive mortgage delinquencies higher. Since March, more than two million additional borrowers have fallen at least 60 days behind on their loan payments, according to LPS Applied Analytics. A record 13.15% borrowers were delinquent or in foreclosure in November.
"They need to have a radical restructuring of the program that would include dealing with the unemployment issue, dealing with the underwater mortgage issue and making the program much more effective and efficient," said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.
About 25% of borrowers who receive trial modifications are expected to fall out of the program because they don't make required payments, the Treasury Department said. For those who received a permanent modification, the median monthly payment dropped from $1,419 to $830, the department said.
"In a huge number of cases, the payment...is being reduced to or even below what a comparable rental property is likely to go for," said Thomas Lawler, an independent housing economist. "Unless the borrower is materially upside down, there is a strong incentive to remain current."
Among the largest mortgage companies, Wells Fargo completed 8,424 modifications and has more than 10,000 additional fixes pending. J.P. Morgan Chase & Co. completed 7,139 modifications and has another 5,518 pending.
Citigroup's CitiMortgage unit has completed nearly 5,000 modifications and has 6,968 pending. At Bank of America Corp., there were 3,183 permanent fixes with another 9,178 modifications pending.
Wells Fargo said it expects about half of borrowers who make the required trial payments to ultimately receive a completed modification under the Obama plan. Of those who don't, about half are likely to receive a modification outside the program, said Michael Heid, co-president of Wells Fargo Home Mortgage.
But a quarter of the borrowers in the trial program are likely to lose their homes through foreclosure or short sale, Mr. Heid said. They include borrowers who haven't provided any documents or don't qualify for a modification because they have too much debt or their income isn't sufficient because of unemployment and underemployment.
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