Monday the Obama administration threatened to fine mortgage lenders unless they do their best to give hard-pressed homeowners a permanent break on monthly payments.
With foreclosures still rising and roughly 375,000 borrowers seen as eligible for permanent loan modifications by year end, the Treasury and Housing and Urban Development departments want to make sure that banks come through on the promise of lower payments.
"Banks should be moving more rapidly and more efficiently to decisions once documents are in and we will have more detailed metrics on that in coming months," Assistant Treasury Secretary Michael Barr said during a conference call.
Some 650,000 borrowers have completed trial modifications under the Home Affordable Modification Program that was initiated by the Obama administration earlier this year, Reuters reports.
The U.S. Treasury on Monday set guidance on a plan for mortgage companies to use "short sales" and other loan modification alternatives to stem a rising tide of foreclosures.
The Home Affordable Foreclosure Alternatives Program simplifies the procedures for completing short sales, a growing practice in which a house is sold for less than the principal owed on existing mortgages, according to an announcement on the Treasury's website, Reuters reports.
Meanwhile, Robert Davis, executive vice-president of the American Bankers Assn. in Washington, said yesterday that unemployment is "the primary driver of defaults right now." He said he was "puzzled" by the stepped-up pressure.
One purpose of the trial period "is to protect the taxpayer by making sure these loan modifications will work before anything is paid out to the lender," Davis said. "Suddenly, for that to become a measure of bad performance when institutions are doing everything they can, is just baffling."
The Administration's initiative provides a cash incentive of $1,000 to the mortgage servicer once a loan is converted from a trial to a permanent modification, plus annual payments of $1,000 for as long as three years, provided the loan remains in good standing.
Bank of America has started trial modifications on 14% of its eligible loans as of October, according to the Treasury. The Charlotte-based bank, the largest in the U.S. and the biggest mortgage servicer, has 990,628 eligible loans, a greater total than any other company on the Treasury list. A spokesman for Bank of America, Dan Frahm, has said the eligibility data may be overstated.
"As many as one in three of those borrowers listed as eligible for the program will not actually qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31%, or is unemployed," Frahm said in a Nov. 10 interview, BusinessWeek reports.