The Wonk Room

Bank Of America Failing To Comply With Treasury’s Mortgage Modification Program

This post was co-written by Andrew Jakabovics, Associate Director for for Housing and Economics at the Center for American Progress Action Fund, and Pat Garofalo.

Seemingly deliberate noncompliance with the Home Affordable Modification Program (HAMP) may explain why Bank of America has consistently lagged behind the other large servicers in the share of delinquent loans that have been modified under the program. Ever since the Treasury Department began releasing data on the performance of servicers participating in HAMP, Bank of America has always been dead last of the four large servicers.

BofA has been participating in HAMP since its inception in mid-April. As of the end of October, it had active trial modifications on 14 percent of its estimated 991,000 eligible mortgages. This rate is less than half that of Wells Fargo (29 percent), which is third among the big servicers. Even US Bank, which has a much smaller portfolio but only signed up for the program on September 9, has been able to get 15 percent of its borrowers into trial modifications.

The reported percentage of modifications for each servicer is calculated based on the number of active modifications divided by the number of loans that are at least 60 days late and otherwise meet eligibility criteria. But as this recent letter demonstrates (which is available here, courtesy of the Coalition for Mortgage Industry Solutions), BofA is actively soliciting borrowers to participate in its own private mortgage modification program, without first verifying whether or not the borrower is eligible for HAMP. (In the full document, the borrower’s personal information has been blacked out.)

The letter clearly indicates that BofA has no idea whether or not the borrower qualifies for HAMP, yet they are still offering an alternative program. This diversion is an apparent violation of the contract signed with Treasury. The Servicer Participation Agreement stipulates:

Servicer shall perform the Services for all mortgage loans it services, whether it services such mortgage loans for its own account or for the account of another party, including any holders of mortgage-backed securities (each such other party, an “Investor”).

The “Services” referred to in this section are elsewhere in the contract defined as “All services required to be performed by a participating servicer…including, but not limited to, obligations relating to the modification of first lien mortgage loans and the provision of loan modification and foreclosure prevention services relating thereto.”

The program guidelines released in March by Treasury quite plainly state that “participating servicers are required to consider all eligible loans under the program guidelines unless prohibited by the rules of the applicable PSA and/or other investor servicing agreements. Participating servicers are required to use reasonable efforts to remove any prohibitions and obtain waivers or approvals from all necessary parties.”

In case there remains any ambiguity as to whether a servicer can pull borrowers out of the pool to offer them a non-HAMP-compliant modification before determining their status under HAMP, Treasury official Herbert Allison recently testified, “under HAMP’s loan modification guidelines, mortgage servicers are prevented from ‘cherry-picking’ which loans to modify in a manner that might deny assistance to borrowers at greatest risk of foreclosure.”

So BofA can’t simply suggest an alternative program to this homeowner without determining eligibility for HAMP, and by doing so, it is potentially lowering the number of successful HAMP modifications it completes. Given the size of BofA’s portfolio, its compliance with program rules — particularly as it pertains to getting eligible borrowers into the program — directly impacts the public’s perception of the success of HAMP. If BofA were performing as well as CitiMortgage, Treasury would have reported an additional quarter million mortgages in its HAMP totals.

Diverting eligible borrowers from HAMP threatens to undermine support for the program. Treasury should not allow any contractual breaches to continue.

Sen. Isakson Warns Of ‘A Dramatic And Awful Situation’ If Congress Doesn’t Subsidize Houses For The Rich

The Senate Banking Committee held a hearing today to discuss whether or not Congress should extend and broaden an $8,000 first-time homebuyer tax credit that was included in the economic stimulus package. If Congress doesn’t act, the credit will expire on Nov. 30.

The credit’s leading champion has been Sen. Johnny Isakson (R-GA), a real-estate industry favorite who was actually called before the committee to testify. Isakson told the committee that extending the credit is “our way out” of the current recession, and warned that if the credit is not extended, the U.S. economy will tumble into a “dramatic and awful situtation”:

If we don’t do the housing tax credit, in my personal opinion, and extend it through midyear next year and take away the first-time homebuyer means test and raise the income qualification, we will have a dramatic and awful situation in the United States of America from which recovery is going to be even more difficult than we’ve experienced already…I think it’s our way out.

Watch it:

As I’ve pointed out before, the credit is targeted poorly, and is a very expensive and inefficient way to stabilize housing prices. And Isakson’s proposals to open the credit to all buyers (instead of only first-time buyers) and remove the credit’s income cap will turn it into a government subsidy to rich homebuyers who would have bought their homes anyway.

The National Association of Home Builders, which favors extending and broadening the credit, calculated that such a move will only cause about 383,000 additional sales through 2010. At the expected $40 billion total price tag for the program, this breaks down to $104,400 per additional home sold. And to be fair, the hearing was a bipartisan love-fest for the credit, with both parties lavishing praise onto it.

If Congress is actually worried about a “dramatic and awful situation,” it might want to take a look at some of the latest foreclosure data. After all, in terms of foreclosures, the last three months were the “worst three months of all time”:

During that time, 937,840 homes received a foreclosure letter…That means one in every 136 U.S. homes were in foreclosure, which is a 5% increase from the second quarter and a 23% jump over the third quarter of 2008…Most disturbing is that all foreclosures — not just repossessions — are rampant despite efforts to corral them. Not only has the Obama administration’s Making Home Affordable foreclosure prevention program taken a bite out of REOs but lenders themselves have scaled back repossessions over the past few months to give the program time to work.

At the end of the day, there’s little chance that the credit will promote additional home sales, and it may even artificially prop up housing prices, prolonging the economic crisis by delaying the housing market from hitting bottom. The credit undeniably makes for great politics, but in terms of policy, the money would be far better spent on foreclosure prevention efforts or neighborhood stabilization.

Is The Administration’s Mortgage Modification Program Going To Be Enough?

This week, the Treasury Department announced that the administration’s Home Affordable Modification Program (HAMP) — which is part of the larger Making Home Affordable (MHA) program — has resulted in lower monthly mortgage payments for 500,000 homeowners. According to Treasury, the program has hit this milestone three weeks ahead of schedule.

While a half-million modifications is nothing to sneer at, as Mark Zandi of Moody’s Economy.com said, “it’s a help on the margin…but it’s not going to end the foreclosure crisis.” And Theo Francis at BusinessWeek noted this distressing tidbit of data:

Mortgage servicers actually signed up fewer homeowners in September than they did in August — 100,216 last month, down from 133,192 the month before. That was even below the 110,397 signed up in July. Deceleration doesn’t bode well for a program that hasn’t yet hit its halfway point.

Especially troubling is that some banks still can’t get their modification programs rolling, despite the bevy of federal incentives that HAMP provides. Bank of America has only managed to modify mortgages for 11 percent of eligible homeowners. Every time that Treasury releases new data, it becomes painfully apparent that some banks just aren’t up to the task — or aren’t interested — in dealing with the mortgages that they hold.

In a report released yesterday, the Congressional Oversight Panel (COP) for the Troubled Asset Relief Program said that another problem with HAMP is that the foreclosure crisis has expanded far outside the scope of mortgages for which HAMP applies:

Many of the coming foreclosures are likely to be payment option adjustable rate mortgage (ARM) and interest-only loan resets, many of which will exceed the HAMP eligibility limits. HAMP was not designed to address foreclosures caused by unemployment, which now appears to be a central cause of nonpayment, further limiting the scope of the program. The foreclosure crisis has moved beyond subprime mortgages and into the prime mortgage market. It increasingly appears that HAMP is targeted at the housing crisis as it existed six months ago, rather than as it exists right now.

The COP advocates looking at a bridge loan program for unemployed workers, modeled off of Pennsylvania’s Homeowner Emergency Mortgage Assistance Program, while Tim Fernholz points to the merits of allowing homeowners “to remain in their home as rent-paying tenants.”

I still think that mandatory mediation — which requires lenders to meet with the borrower, judges, housing advocates and attorneys to try and come to some alternate arrangement before finalizing a foreclosure — has a lot of merit. A mandatory mediation program in Philadelphia has kept 60 percent of borrowers out of foreclosure, while a state-wide program in Connecticut has a 57 percent success rate. At a minimum, the federal government should be supporting any state or local mediation programs and requiring mediation on all federally owned mortgages.

How Congress Can Improve The Inefficient, Expensive Homebuyer Tax Credit

Momentum is building in Congress to extend and possibly expand an $8,000 first-time homebuyer’s tax credit that is set to expire on Nov. 30. The credit was created as part of the economic stimulus package passed in February, and the home builder’s lobby, along with realtors and scattered members of Congress (most significantly Majority Leader Harry Reid (D-NV)), are pushing for the credit, saying that it is a necessary part of economic recovery:

The National Association of Realtors said the main thing was to act quickly, given the time it takes to arrange financing and close on a home, and make the credit as robust as possible given the budget situation. “Still reeling from the most devastating downturn since World War II, housing is only beginning to gain the momentum needed to return to a stable market,” added Ken Gear, executive director of the Fix Housing First Coalition. “Unless the homebuyer tax credit is extended, we risk undoing all the progress that has been achieved.“

Actually, the jury is still out on how effective this tax credit is in aiding housing prices, but one thing is for certain: it’s wildly expensive. The credit has already cost $15 billion, more than twice its original estimate, and for that price, about 1.9 million homes were purchased that wouldn’t have been bought anyway, for a final cost of $43,000 per additional buyer.

But it gets worse. The National Association of Home Builders (which is very much in favor of extending and expanding the credit) calculates that an extension will only cause about 383,000 additional sales through 2010, which, at the expected $40 billion total price tag, breaks down to $104,400 per additional home sold. Talk about an inefficient use of money!

“Four out of five of the buyers were given $8,000 for doing something they were going to do anyway,” CAP’s Andrew Jakabovics told NPR. “That money could theoretically go towards foreclosure prevention and other housing market interventions that would be more effective.”

But since Congress seems pretty intent on going through with an extension (as Chuck Marr, director of federal tax policy at the Center on Budget and Policy Priorities, said, the credit is “political apple pie“), the least it could do is place some meaningful restrictions on it, to target the credit in ways that will maximize its effectiveness.

First, any thought of removing the credit’s income cap (which prevents couples making more than $170,000 per year from claiming it) should be tossed aside. And instead of opening it up to anyone and everyone, as Sen. Johnny Isakson (R-GA) wants to do, the credit should be restricted to first-time homebuyers, buying an already existing home in an economically distressed area. Calculated Risk goes one step further, advocating that the credit only be open to people who were part of another household for the last year, and intend to form a new household (so the credit wouldn’t be available to all renters looking to buy).

At least restrictions like these would increase the chance that the credit does what it’s intended to do — stabilize home prices in areas that have been torn apart by foreclosures.

Sen. Isakson: The Government Should Help Rich Homeowners Buy New Houses

The Georgia Association of Realtors cheers on Sen. Johnny Isakson (R-GA)

When it was first being debated, we here at The Wonk Room pointed out that the credit is poorly targeted and doesn’t do much to incentivize home purchasing that wouldn’t have happened anyway. But instead of acknowledging these problems, Sen. Johnny Isakson (R-GA) wants to not only reauthorize the credit, but double it, remove the income cap, and make buyers who already own a home eligible for it:

“I’m working the floor now to make everyone aware that the $8,000 credit sunsets on Nov. 30,” Isakson, a Georgia Republican, said in an interview today. The former real estate executive, says he is “talking to everybody and anybody”…Isakson’s legislation would extend the program through the end of 2010, almost double the credit to $15,000 and remove restrictions that prohibit individuals who already own homes or earn $75,000 — $150,000 for couples — from getting the tax break.

Isakson, who professes great concerns about the deficit the rest of the time, is advocating a needlessly expensive gift to the real estate industry, dressed up as an economic recovery aid. This credit has already cost $15 billion, which is more than twice its original estimates. Calculated Risk found that this broke down to $43,000 per additional buyer, which would increase to $30 billion, or approximately $60,000 per additional buyer, if the credit were expanded and extended.

The reason that the credit costs so much per additional house sold is because most people claiming it would have bought their house anyway. By the National Association of Realtors’ own admission, 1.8 to 2 million credits will result in only 350,000 additional sales that would not have taken place without the credit. And by removing the income cap, that incentive is reduced even further, as its unlikely that the money would push the super-rich into purchasing houses that they otherwise wouldn’t have, but they can claim the credit anyway.

Also, since Isakson’s plan opens the credit up to people who already own homes, many of the credits will be dispersed without resulting in the net purchase of a home, as people will be simply leaving one home for another. Finally, it will likely lead to unnecessarily propped up home prices, as people spend more on homes than they otherwise would have — and we all saw the effect that artificially inflated home prices can have on the economy.

In the end, extending the credit would amount to nothing more than a boon for the real estate industry, at the federal government’s expense. And with that in mind, it should come as no surprise that the real estate industry is far and away Isakson’s largest donor.

Norquist’s Bizarre Foreclosure Prevention Plan: Tax Repatriation And Congressional Vacations

Today, the Wall Street Journal reported that foreclosures in commercial real estate could potentially deliver “a roundhouse punch to the U.S. economy just as it struggles to get up off the mat.” Combined with continuing delinquencies on residential mortgages, these commercial foreclosures could spell real trouble for any burgeoning economic recovery.

For the last few months, members of Congress and various economists have been looking at ways to stem the foreclosure crisis, putting forth a series of legislative solutions. However, when MSNBC needed someone to discuss the situation, it turned to Americans for Tax Reform president Grover Norquist, the anti-tax crusader who famously quipped that he’d like to “reduce [government] to the size where I can drag it into the bathroom and drown it in the bathtub.”

When MSNBC’s Carlos Watson asked Norquist how he would prevent foreclosures, he launched into a bizarre non-sequiter about Congressional vacations and the stock market, which ultimately culminated in his advocating for corporate and capital gains tax breaks:

WATSON: So you’re saying the constructive thing that Congress could do is go on vacation for two months, number one, and number two is to say that we won’t issue or pass any additional taxes? That’s what you’re saying would be the solution to stem the foreclosure crisis, both on the residential and commercial side?

NORQUIST: Both of those would help. If we could actually get Congress to agree, we should do another repatriation — 2004, 2005, Congress said ‘companies that have money overseas, you can bring it back and not pay a prohibitive 35 percent tax’…We could do that again this year…And what we ought to do also is abolish the capital gains tax.

Watch it:

It’s abundantly clear that Norquist has no idea what’s happening in the mortgage sector, and merely fell back on the conservative tax cut wish-list. The inclusion of tax repatriation is particularly egregious, as not only does it have nothing to do with mortgages, but studies have shown that the 2004 version was simply a tax windfall for corporations. The break allowed corporations to bring back money that they held offshore at a lower tax rate, for the purpose of domestic reinvestment. But the National Bureau of Economic Research found that very little money was actually reinvested:

Now the most detailed analysis of what actually happened — using confidential government data as well as corporate reports — has estimated what happened to the $299 billion companies brought back from foreign subsidiaries. About 92 percent of it went to shareholders, mostly in the form of increased share buybacks and the rest through increased dividends. There is no evidence that companies that took advantage of the tax break…used the money as Congress expected.

In light of this performance, I hope MSNBC will think twice before bringing Norquist on to speak about foreclosures again.

Wall Street Journal Wants To Add $5 Trillion To The Federal Debt With Nonsensical Accounting

A few weeks ago, TARP Inspector General Neil Barofsky ignited a media firestorm by adding up the cost of every financial rescue program ever proposed since 2007 and coming up with $23.7 trillion as possible government liability for the economic rescue.

The total was meaningless, because for the government to ever be on the hook for that much, every bank in America would have to fail, every mortgage held by the government would have to be worthless, and Treasury itself would have to default on its securities. (And Barofsky added in the full cost of programs that were discontinued or never even begun.)

Of course, that didn’t stop cable news anchors like Sean Hannity and Lou Dobbs from claiming that $23.7 trillion would be the total cost for government bailouts. And with that number finally out of the public discourse, along comes the Wall Street Journal’s editorial board, claiming that the federal government should add $5 trillion to the national debt by accounting for the possible liabilities of Fannie Mae and Freddie Mac:

Putting Fannie and Freddie on the national books would in an instant increase the national debt held by the public by 75%—to $12.7 trillion, from $7.3 trillion today…[T]his takes debt as a share of GDP to nearly 90%, or nearly double the peak it reached in the 1980s when the political class was hyperventilating even as the Reagan deficits were falling as a share of GDP. Congress would have to add that $5.4 trillion to the increase in the federal debt limit that Treasury Secretary Timothy Geithner is now requesting. But that would be truth-in-budgeting.

This proposal makes absolutely no sense. But it would be a really convenient way for conservatives to peg the Obama administration with an explosion in federal debt, and bolster arguments that increasing deficits and debt warrant cuts in spending.

Like Barofsky’s estimate, the Journal’s number assumes that every mortgage held by Fannie and Freddie goes into default and all of the homes turn out to be worthless. In other words, it accounts for all of the liabilities of the GSE’s while not taking into account any of their assets.

Conforming mortgages owned by Fannie and Freddie are actually performing far better than privately held and securitized mortgages. Fannie and Freddie account for 57 percent of the mortgage market, but only 22 percent of delinquencies, while private label companies have seven percent of the mortgages but 42 percent of the delinquencies. Does the Journal think all of those privately held mortgages need to be written off as a sunk cost as well?

Following the Journal’s proposal would be like assuming that the government will have to pay out every single deposit insured by the Federal Deposit Insurance Corp. — and thus putting them all on the government books today — when the likelihood of all that deposit insurance needing to be paid out is incredibly small and would be indicative of problems that far outweigh federal budget accounting. It’s a good way to pin a big number on the guys in charge, but it doesn’t accurately reflect much of anything.

Cavuto Worries About Banks Being On A ‘Cockamamie Scarlet Letter List’

Yesterday, the Treasury Department released a report on the progress of mortgage modifications under the Making Home Affordable plan, which is supposed to help 3 to 4 million troubled homeowners stay in their homes. However, the plan has gotten off to a very slow start, with only about 200,000 modifications underway (while 1.8 million homes went into foreclosure in the first six months of 2009). As I’ve pointed out before, 108,000 of those modifications are on mortgages owned by Fannie Mae or Freddie Mac, so privately held mortgages constitute less than half of the modification effort, even though they account for 55 percent of delinquencies.

The Treasury report names specific companies that have been the slowest in getting the modification effort off the ground. As the AP reported, “by publishing the names of companies that are lagging behind in the government’s plan to ease the housing crisis, officials are counting on public outrage to get the industry on track.” But such public shaming has Fox News’ Neil Cavuto all riled up, and he’s protesting the “cockamamie scarlet letter list“:

Think of what the government could be doing here, publicly shaming banks that might be trying to avoid the very thing that got a lot of them asking for federal dough in the first place: providing easy dough to folks who shouldn’t have gotten the dough in the first place…They can’t win, and now on some kind of cockamamie scarlet letter list, they can’t lose.

Watch it:

For his part, Cavuto never misses an opportunity to blame our economic woes on banks lending to poor people who couldn’t pay it back. But there’s a very good reason for giving a bank-by-bank breakdown of the modifications. As this graph shows, there’s a big disparity between the banks doing the most modifications and those doing the fewest.

There’s a clearly discernible break between Citigroup (at 15 percent) and Wells Fargo (at 6 percent). Bank of America, which received multiple infusions of cash from the TARP (totaling $45 billion), has done the worst among the big banks, with trial modifications begun in only 3.5 percent of cases. BofA’s offer acceptance rate of 28.1 percent is less than half of the program’s average.

Is this discrepancy between the numbers indicative of a problem in the structure of the program, or are certain servicers just dragging their feet? The only way to know is to look at the data from individual firms. But Cavuto prefers to cling to his misconceived notion that lending to poor folks created the crisis, and thus some firms doing far fewer modifications is indicative of nothing but those banks’ prudence.

Sen. Durbin: We’ll ‘Be Forced Into Alternatives’ To Cram-Down, To Create ‘A New Climate Of Negotiation’

Back in April, the banking industry and its allies in Congress successfully defeated a change to bankruptcy law that would have allowed bankruptcy judges to cram-down mortgage payments for troubled homeowners. The banking industry spent $42 million on lobbyists to defeat cram-down in the first quarter of 2009 alone, leading Sen. Dick Durbin (D-IL), the bill’s sponsor and chief proponent, to conclude that the banks “frankly own the place.”

But with no end to the foreclosure crisis in sight, interest in cram-down has been renewed, as the Senate Judiciary committee held a hearing on it and House Financial Services Chairman Barney Frank (D-MA) expressed an interest in reviving it in the House. Today, Durbin spoke with The Wonk Room about the future of the legislation:

DURBIN: We’ve gained from the first time I offered it to the most recent. We have more senators supporting it. The banking industry is extremely powerful on Capitol Hill and this is a proposal that they hate the most. Unfortunately, they don’t have an alternative and the foreclosure crisis is getting much worse.

Q: If cram-down doesn’t come to pass, are any of the other fixes realistic? Right to rent, something like loans for the unemployed?

DURBIN: I think we’re going to be forced into alternatives and I’m open to them…And even the bill I’m talking about, the bankruptcy reform, isn’t the complete package. We ought to be doing a lot of things. I think [cramdown is] central to it, because it creates a new climate of negotiations. If that lender knows that at the end of the day, the borrower might end up in bankruptcy court and the judge might have the last word, there’s an incentive to sit down across the table.

Watch it:

Durbin added that he is going to begin asking mortgage companies for regular reporting on their progress in completing modifications, adding that “I think they can do a lot more.”

It’s undeniable that the mortgage servicers are not keeping up with the flood of foreclosures, which prompted the administration to bring 25 mortgage companies to the White House for a scolding last week. Thus far, just 200,000 homeowners nationwide are on track for a modification, with 108,000 of those having mortgages owned by Fannie Mae or Freddie Mac, both of which are pressuring companies to get modifications moving. So privately held mortgages constitute less than half of the modification effort, even though they account for 55 percent of delinquencies.

The New York Times reported that “many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.” Given that reality, Congress needs to find a real stick — cram-down or otherwise — to be used against companies eschewing modifications.

Can Cramdowns Make A Comeback?

Three months after the idea met its demise in the Senate, Mike Lillis at the Washington Independent noticed that the Senate Judiciary committee has scheduled a hearing to reconsider cramdowns — a proposal to allow bankruptcy judges to modify the terms of mortgages:

Nearly three months after the Senate killed a House-passed proposal allowing homeowners to stave off foreclosure through bankruptcy, some upper-chamber Democrats are wondering if it isn’t time to revisit the issue. Leaders of the Senate Judiciary Committee, not satisfied that mortgage lenders and servicers have done enough to prevent foreclosure voluntarily, have scheduled a cramdown hearing for Thursday.

As I outlined last week, there are a number of plans circulating that would address the ever-increasing number of foreclosures and attempt to boost the sputtering administration plan to encourage mortgage modifications. The problem with the current plan is that lenders would rather wait to write down a loan’s losses or hope that a borrower makes a miraculous turn away from foreclosure, and there’s no stick to incentivize them into pursuing a modification. Cramdown was supposed to be that stick, but then it ran into the Senate.

The administration has recently started pushing lenders to voluntarily up the pace of modifications. It sent a letter to mortgage firms saying that “we believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share.” Financial executives are coming to the White House on July 28 to discuss how the modification program has been implemented, and “the administration plans to grill servicers that have done few modifications or have had many complaints.”

However, all of this prodding is no substitute for a real stick, and Treasury has thus far been reluctant to endorse any other legislative remedies. “We have enough tools,” said Herbert Allison, the Treasury Department’s assistant secretary for financial stability. But Congress seems to be open to at least exploring new legislative efforts.

Cramdown does not have to be the stick that Congress settles on (and given the way that it went down last time, it probably won’t be). Right-to-rent, which would give delinquent borrowers the ability to surrender their property but rent it at market price for a set period of time, is one option. Lenders, reluctant to become landlords, might find this a good reason to modify loans.

Another option is taking away the tax advantage enjoyed by trusts that hold mortgage-backed securities “if the investors refuse to allow modifications.” And then there is mandatory mediation, a very successful program requiring that lenders and borrowers meet and try to work out an agreement before a foreclosure can proceed. In the end, the point is to incentivize modifications, and it’s encouraging to see Congress acknowledging that the current effort is falling short.

A Record Number Of Foreclosures And The Options For Preventing Further Damage

In what’s becoming a monthly ritual, today’s housing data report from RealtyTrac revealed that foreclosures continue to pile up. According to the report, foreclosures in June were up 4.57 percent from the previous month and 33 percent compared with the same period last year. During the first six months of 2009, “a record 1.53 million properties were in the foreclosure process.” One in 84 homes received a foreclosure notice in that period.

It’s no secret that the Obama administration’s plan to spur mortgage modifications is sputtering, with lenders either reluctant or simply unable to keep up with the modification demand. As the Wall Street Journal reported today, some servicers have ramped up their modification programs, but others are lagging behind, and even those that are doing the most can’t keep up with the flood of borrowers facing financial difficulties. “The Obama plan doesn’t seem to be having a significant effect,” said Mark Zandi of Moody’s Economy.com. “Foreclosures will continue to rise through the end of the year.”

So what can be done? In recent days, a variety of plans have been floated — both by the administration and Congress — for slowing the rate of foreclosures. They are detailed below:

None of these plans will be a panacea for the housing problem, and they all have their respective strengths and weaknesses, but it’s absolutely critical that a fix for the foreclosure problem be found.

Fed Study Finds Lenders Still Not Willing To Make Mortgage Modifications

The Federal Reserve Bank of Boston has a new study out that, if true, throws a serious wrench into the Obama administration’s plan for preventing foreclosures. The Obama plan hinges on the notion that it is more expensive for a lender to put a homeowner through foreclosure than to modify that homeowner’s loan. However, the Boston Fed found that this may not be the case:

[W]hat is the explanation for why lenders do not renegotiate with delinquent borrowers more often? We argue for a very mundane explanation: lenders expect to recover more from foreclosure than from a modified loan. This may seem surprising, given the large losses lenders typically incur in foreclosure, which include both the difference between the value of the loan and the collateral, and the substantial legal expenses associated with the conveyance. The problem is that renegotiation exposes lenders to two types of risks that can dramatically increase its cost.

The banks supposedly think that borrowers will either redefault on their modified loan or fix their financial problems all by themselves, either of which would make a modification not worth it. Now, the Boston Fed only looked at subprime loans, so applying its findings to current foreclosures (which are increasingly in prime loans) isn’t exact. However, it’s undeniable that the loan modification effort has been slow in getting off the ground, and right now, there’s nothing in the administration’s housing plan that incentivizes lenders to make more modifications.

Cram-downs (which would have enabled bankruptcy judges to write down mortgage payments) were once meant to be that incentive. But that provision met its end in the Senate, thanks to an intense lobbying effort on the part of the banks.

As Tim Fernholz reported, Treasury doesn’t seem interested in changing the modification program just yet, but if the number of foreclosures keeps rising and banks keep refusing to quicken the pace of modifications, its hand might be forced. So what other stick can be implemented to encourage lenders to modify loans? Center for Economic and Policy Research co-director Dean Baker has been advocating for giving foreclosed-upon homeowners the right to rent their homes at market value for a specified period of time:

This “right to rent” proposal would immediately give homeowners security in their home, so that if they liked the home, the schools, and the neighborhood, they would have the option to stay there for a substantial period of time. This temporary change in foreclosure rules would also give lenders a strong incentive to renegotiate mortgage terms to allow homeowners to stay in their homes as owners, since few lenders will want to become landlords.

As the recession continues, more and more borrowers are going to find themselves facing foreclosure, and it’s imperative that the administration find a way to prevent as many as it can.

Philadelphia Mandatory Mediation Program Keeps 60 Percent Of Borrowers Out Of Foreclosure

Reuters has some new data today on a foreclosure prevention initiative that Philadelphia has implemented. Under the city’s mandatory mediation program, before a homeowner can be foreclosed upon, the lender and borrower must meet with judges, housing advocates and attorneys “in the hope that a resolution can be found under which owners will resume payments they can afford and lenders will no longer need to dispose of distressed property.”

The lender is in no way forced to find a workable solution with the borrower, but the simple act of putting all the parties together in a room has produced some encouraging results:

A program to avert residential mortgage foreclosures has saved almost 60 percent of its participants from losing their homes in a sheriff’s sale, officials said on Tuesday. Philadelphia’s Mortgage Foreclosure Diversion Pilot Program…resulted in 2,776 properties permanently or temporarily saved from sale between its inception in June 2008 and May 31 this year out of 4,690 that were referred to the program.

A statewide program in Connecticut has produced similar numbers, with 57 percent of borrowers able to stay in their homes. But despite the effectiveness of mediation meetings, as of the end of last year, about 80 percent of homeowners at risk of losing their homes had not engaged in any efforts to make a deal with their lender.

Sen. Arlen Specter (D-PA) is reportedly putting together legislation to replicate the Philadelphia program at the national level. Conveniently, CAP’s Andrew Jakabovics and Alon Cohen have some suggestions for the sort of steps that the federal government can take to promote such an effort:

– Congress should fund state and local mandatory mediation programs just as it provides neighborhood stabilization funds to alleviate the housing crisis.

– The Department of Housing and Urban Development should issue guidance that explicitly permits community development block grants to be used to fund mandatory mediation programs.

– The government should require mediation for all federally insured home mortgages.

Bloomberg reported yesterday that delinquencies on prime mortgages more than doubled in the first quarter of 2009, compared to a year earlier, “as U.S. efforts to help homeowners failed to keep pace with job losses.” The foreclosure problem is simply not going to abate any time soon, so any reasonable steps that can keep borrowers in their homes — including mandatory mediation — can, and should, be taken.

Sen. Bond: Banks Provide ‘Too Much Information,’ So We Don’t Need Consumer Protection

Today, Sen. Kit Bond (R-MO) appeared on CNBC to provide his thoughts on, among other things, the consumer protection agency that the Obama administration wants to create as part of its financial regulation package. Like the banking lobby, the Chamber of Commerce, and some conservatives in Congress, Bond is opposed to creating the agency. However, his reasoning seems to be that, in his personal experience, banks actually provide “too much information” to consumers:

I think, really, the idea to have a consumer protection regulator, in addition to a banking regulator, is a bad idea…We bought a bunch of houses in recent years. My wife likes to move. And each year, each time we go through this, you get these stacks of paper. You get too much information. It is not consumer information, and that is part of the problem.

Watch it:

So, Sen. Bond, how many houses do you own? But more importantly, isn’t the fact that mortgage contracts are getting larger and more complex an argument for the creation of a consumer protection agency? It would seem that the overabundance of material would make it more likely that a consumer gets unwittingly ripped off.

As David Lazarus wrote in the Los Angeles Times, the real problem here is that banks “have consistently proved themselves unworthy of customers’ trust“:

From runaway credit card interest rates to mortgages that turn into one-way trips to foreclosure, lenders have repeatedly demonstrated their inability to deal with customers fairly and responsibly. Instead, they place their own interests ahead of all other considerations, and in so doing expose frequently unsophisticated consumers to enormous risk and financial ruin.

There are a lot of ways to get lost in the forest of subprime mortgages, reverse mortgages, and other complex financial instruments, even without taking into account the banks’ active predatory actions. Bond wants to have bank regulators also regulate products on the ground level, but those regulators have already demonstrated that they operate at 30,000 feet, watching over the soundness of an institution overall (and not even doing a good job with that), but not the financial safety of consumers. I think it’s asking too much to have them policing both an institution’s health and the way in which that institution interacts with consumers.

But at least Bond didn’t join the rest of the CNBC crew in claiming that only “suckers” and “idiots” are victims of predatory lending.

Mortgage Bankers Association Wants To Revive Failed Bush Preemption Policy

One of the planks in the Obama administration’s plan for financial regulation is ensuring that states are allowed to strengthen mortgage standards if they feel that the federal standards are not tough enough or if they notice a problem unique to their state that needs addressing. Yesterday, the Mortgage Bankers Association (MBA) wrote a letter to Treasury Secretary Tim Geithner and National Economic Council Director Lawrence Summers to complain about this idea:

The Mortgage Bankers Association has weighed in against an Obama White House proposal to allow states to write tougher lending rules than the federal government. “Anything short of federal preemption risks perpetuating one of the problems of today’s regulatory structure for mortgages and would seem to be inconsistent with key objectives of the administration’s plan,” MBA Chief Executive John A. Courson wrote Thursday.

But we’ve been down that road before, and it’s one of the reasons that we’ve wound up with the mortgage mess that we have on our hands today.

In 2002 and 2003, various states, including Georgia, New York, New Jersey, and New Mexico, proposed laws aimed at cutting down on predatory lending and subprime mortgages, which were becoming increasingly large problems. But then, citing the “increased costs and an undue regulatory burden” on banks, both the Office of Thrift Supervision and the Office of the Comptroller of the Currency swooped in to exempt national banks from state standards, preempting anything that the states might do.

At the time, Diana Taylor, the New York superintendent of banks, said “I am concerned because this is an unelected official in Washington who is overruling state legislators by regulatory fiat. The state legislature has a better idea of the consumer situation in the state than an unelected official in Washington.” Of course, we now know the havoc that subprime lending wreaked on the economy.

Obama has already directed executive branch officials “to review every regulation adopted in the past ten years to scrub them of inappropriate preemption language.” His goal of not preempting state lending regulations is simply consistent with this approach. But the MBA would rather the banks stay under the same sort of regulatory regime that missed the subprime mess in the first place.

Making The Case For Mandatory Foreclosure Mediation

The Obama administration’s housing plan centers on the idea that, given enough in the way of incentives, lenders will modify loans for troubled homeowners, which enables both the homeowner to keep their home and the lender to keep receiving payments. However, the program is having some difficulty getting off the ground:

The Obama administration’s $75 billion program to reduce foreclosures has been beset by backlogs and delays, leading many overstretched homeowners to complain about unreturned phone calls and inaccurate information from lenders, while others say they were denied help for reasons that weren’t clear.

“The loan-modification program is suffering. What we’re doing right now isn’t working as expected,” says Richard Smith, CEO of Realogy. “Banks, unfortunately, just weren’t geared up for this.” This is troubling, especially since housing experts are warning that “a new wave” of foreclosures may be on its way — as borrowers with adjustable rate mortgages that were a step above subprime start to see their rates rise — which could cause as many problems, if not more, as subprime defaults did.

Fortunately, the good people at CAP have been thinking about this. In a paper coming out on Monday, Andrew Jakabovics and Alon Cohen recommend that the federal government do everything it can to ramp up mandatory mediation between borrowers and lenders as a way of nipping preventable foreclosures in the bud. The idea is that, before putting a homeowner into foreclosure, a lender would have to sit down with the borrower to see if they can work out an acceptable deal that will enable the borrower to avoid foreclosure.

The reason for this is that mandatory mediation — the simple act of forcing lenders to meet with borrowers — has already proven quite successful at the city and state level. Consider the example set by Philadelphia:

By requiring lenders seeking a foreclosure to sit down with the distressed homeowner and mediate a resolution, the Philadelphia Foreclosure Diversion Program has succeeded in keeping 78% of families in their homes. If those families had been in other jurisdictions they would have lost their homes to foreclosure.

A program in Connecticut has also seen some success, with 57 percent of borrowers who complete the program remaining in their homes. Connecticut also provides a template for how such a program can be designed at the state level.

While getting to more people than previous efforts (like Hope for Homeowners, which prevented a grand total of one foreclosure), the administration’s housing plan just don’t seem like it can keep up with the rapid rate of foreclosures. It’s worth giving mediation a shot, as foreclosures are proving to be a constant thorn in the side of economic recovery.

CNBC Talking Heads: Only ‘Naive,’ ‘Stupid’ ‘Suckers’ And ‘Idiots’ Were Victims Of Predatory Lending

Yesterday, the Obama administration announced that, as part of its regulatory reform package, it wants to create a new consumer protection agency, charged with overseeing financial products on the ground level. The banking lobby and the Chamber of Commerce both made their opposition to the new agency known, and in the last day have found another strong ally in CNBC.

A host of CNBC talking heads — from Dennis Kneale and Joe Watkins to Larry Kudlow — said that the new agency is actually meant to advance an insidious liberal plot to force banks into making loans to poor people that can’t pay them back. And anyway, the very notion of consumer protection is unnecessary because only “stupid,” “naive,” “suckers” and “idiots” wound up with a subprime mortgage or unfair credit card contract. Watch a compilation:

Nevermind that this whole premise of CNBC’s attack is based on the crackpot conservative theory that forced lending to the poor and minorities, mandated by the Community Reinvestment Act (CRA), caused the economic crisis. This response shows, yet again, how out of touch CNBC is with the real world.

Just this month, Wells Fargo was accused of spending a decade “systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages.” Loan officers actually pushed customers who would have qualified for a prime loan into a subprime. Employees reportedly referred to blacks as “mud people” and to the loans they were offering as “ghetto loans.” As Professor Elizabeth Warren said, “all these lousy mortgages got sold, one family at a time. These were crummy mortgages, like selling plastic spoons that have carcinogens in them or toys that put out little children’s eyes.”

And it wasn’t just in mortgages that predatory lending occurred. Credit cards, particularly those marketed to young people, had all sorts of hidden fees, with rates that could be raised at any time, for any reason, causing boatloads of debt.

The point of the new agency is to keep an eye on financial products on the ground, which is an area traditional regulators have ignored, with severe implications. And yes, the new agency will be responsible for enforcing fair lending laws and the CRA, which as Federal Reserve Board Governor Randall S. Kroszner said, have “been helpful in alleviating the financial isolation of many areas of concentrated poverty.” CNBC’s wholesale dismissal of all of this is a pretty blatant example of what the network really cares about.

Bailed Out Bank Accused Of Intentionally Steering Minorities Toward Subprime Loans

A favorite conservative trope is to blame the housing crisis (or even the entire economic meltdown) on lending in low-income, typically minority, neighborhoods, done under the auspices of the Community Reinvestment Act (CRA). “I don’t remember a blaring call that said, Frannie and Freddie are a disaster, loaning to minorities and risky folks is a disaster,” Fox News’ Neil Cavuto put it.

As CAP’s Tim Westrich noted, the reality is that “CRA-covered institutions succeed at bringing conventional, prime loans to lower-income communities, while non-covered institutions are the ones that drove bad practices.” And according to some of its former loan officers, bailed-out bank Wells Fargo was, for a decade, “systematically singling out blacks in Baltimore and suburban Maryland for high-interest subprime mortgages”:

These loans, Baltimore officials have claimed in a federal lawsuit against Wells Fargo, tipped hundreds of homeowners into foreclosure and cost the city tens of millions of dollars in taxes and city services. Wells Fargo, [former loan officer] Ms. Jacobson said in an interview, saw the black community as fertile ground for subprime mortgages, as working-class blacks were hungry to be a part of the nation’s home-owning mania. Loan officers, she said, pushed customers who could have qualified for prime loans into subprime mortgages. Another loan officer stated in an affidavit filed last week that employees had referred to blacks as “mud people” and to subprime lending as “ghetto loans.”

As Nick Baumann at the Mojo Blog put it, “if this is true, there’s a word for it: evil.” The nasty racism is bad enough, but the fact that these aspiring homeowners were actively steered toward subprime loans when they qualified for a prime loan makes it all even worse.

After all, as the New York Times noted, “for a homeowner taking out a $165,000 mortgage, a difference of three percentage points in the loan rate — a typical spread between conventional and subprime loans — adds more than $100,000 in interest payments.” As Judd Legum pointed out, “many of the individuals who were pushed into these loans may have been able to avoid foreclosure if they were offered the prime loans for which they were qualified.”

This is all part and parcel of the ugly growth of subprime lending — driven by non-CRA covered institutions and encouraged by Wall Street banks ready to buy and securitize anything. That — and not lending in low-income neighborhoods — was really the culprit behind the housing implosion.

Due To Housing Crisis, The Government Now Sitting On More Than 50,000 Homes

Today, USA Today noted one more problematic result of the housing crisis — the federal government is sitting on a lot of homes that nobody really wants to buy:

The combination of a deep recession and a foundering housing market has left the government with more than 50,000 houses on its hands — enough homes to fill a city the size of Riverside, Calif., or Miami. Now federal records show it’s struggling to unload the houses and facing billions of dollars in losses…In many ways, the government’s situation parallels what thousands of other homeowners are confronting: The houses it owns are harder to sell, they typically sit empty longer, and in many cases, their values cratered as the real estate market collapsed.

The government is desperately trying to offload these homes, so much so that the Department of Housing and Urban Development (HUD) lost “39 cents on the dollar for every home it resold last year,” and is set to lose even more this year. This is a pretty big problem that is only going to get worse as the foreclosure rate keeps increasing.

But selling the homes one at a time to individual buyers is not the only way to get them off the government’s hands. One other option is to bundle properties that are in the same general geographic area and sell them to investors to maintain as rentals. This could be a great way to bring much needed rental housing into distressed housing markets. CAP’s Andrew Jakabovics and Ellen Seidman from the New America Foundation go through the possible models to base such a program off of here.

A second option is to strengthen efforts to help communities purchase and rehabilitate foreclosed, vacant properties. These properties could then be sold to low- or moderate-income borrowers, with the understanding that any future profits on the sale of the home will be shared jointly by the homeowner and the public. As David Abromowitz put it:

Beyond the present benefits of economic stimulus, the current sharp home-price plunge is also a unique, once-in-a-generation window to establish a stable stock of long-term, affordable, shared equity housing. Allowing good affordable housing stewards to buy homes in these neighborhoods is responsible policy. The public gets a return on its investment now, and also long beyond the first homeowner is helped.

In any case, it makes no sense for the government to sit on these homes, particularly when you factor in the costs of upkeep. It’s far preferable that the homes get put to some sort of productive use.