Paperwork Eased in Loan-Modification Program
By James R. Hagerty
The Wall Street Journal
January 28, 2010
The Obama administration is trying to simplify the paperwork for people seeking lower home-mortgage payments in an effort to avert more foreclosures.
The Treasury outlined new guidelines Thursday aimed at streamlining requirements for mortgage relief under the administration's Home Affordable Modification Program launched a year ago.
The guidelines specify that borrowers must provide three items to loan servicers, the companies that collect mortgage payments: a form requesting a loan modification, authorization for the servicer to seek tax information from the Internal Revenue Service and evidence of income, such as two recent pay stubs. Previously, some servicers have asked borrowers to fax in copies of their tax returns. Borrowers sometimes couldn't find the needed tax forms or complained that servicers repeatedly lost material faxed to them.
The previous documentation requirements were "somewhat overwhelming" for some borrowers, says Morgan McCarty, head of mortgage servicing at Regions Financial Corp., a banking company based in Birmingham, Ala.
The Treasury also said that, effective June 1, servicers must collect the information before starting borrowers on three-month "trial" loan modifications, during which borrowers must show they can make the payments before being granted a permanent reduction in their loan costs. Many servicers have been starting trial modifications based on unverified information provided orally by the borrower, only to find later that the borrower wouldn't or couldn't provide documentation.
As of Dec. 31, about 900,000 borrowers had been given trial modifications but only 66,465 had been converted to a permanent fix. That largely reflects problems getting documentation. The Treasury acknowledged that some of those 900,000 borrowers won't end up qualifying for a loan modification through the program.
As of Sept. 30, about 7.5 million households—about 14% of those with home loans—were behind on payments or in the process of foreclosure, according to data from the Mortgage Bankers Association, a trade group.
Many of those struggling borrowers owe far more to their lenders than the current value of their homes—a condition known as being "underwater"—and wonder whether it is worthwhile to keep paying. Micah Green, a partner at the law firm Patton Boggs in Washington who represents some large investors in mortgages, says the administration should revamp the program to put more stress on reducing principal owed by borrowers who can show that they would be able to stay current on a smaller, refinanced loan. In many cases, that would require the holders of both a first- and a second-lien loan to accept a write-down of the amount owed, a complicated process.
Treasury officials said Thursday they were looking at ways of helping underwater borrowers but haven't found practical means of doing that on a large scale. "There are no simple solutions," Herb Allison, an assistant Treasury secretary, said in a press briefing.
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