Mortgage Modification not Catching on

The Obama Administration has invested enormous amounts of political and actual capital into assisting homeowners who are at risk of foreclosure with its Making Home Affordable Plan. However the government has found this task less than successful over the past six months for several reasons.

Home loan modification was presented as the shining knight in shining armor that would ride in and save the American homeowner from the big bad lenders in America. The knight willingly rode in with seventy five billion dollars of the public’s hard in earned tax money with the pretense that it would save three to four million Americans from losing their homes to foreclosure from the big bad banks. The plan is barely moving and at the moment millions of homeowners eligible to modify their mortgage have not. Nine percent is the most current figure of homeowners who have had their mortgage modified.  Uncle Sam isn’t happy and is shaking his finger at banks and lending institutions to pick up the pace. Uncle Sam has knowingly named and put on public display lending institutions that were not proceeding fast enough with assisting homeowners with loan modifications or not doing them at all.

Why has the government had to go to such great lengths to get this program moving? Why have lending institutions been slow to response to this program?

Several reasons:

Lenders simply are not set up with procedures to handle loan modifications. In general lenders are set up to sell loans and collect payments by design not reduce interest and principal on the loans they current hold.

The time period that the government set forth for such a large task is not realistic for lenders to set up divisions of employees and retrain them on how to do loan modifications.

The program was announced to the public without having guideline for the lenders to work with in a business manner. Guidelines for the program did not come out until mid June which caused a lack of information and understanding of the program and how it works for all the lenders involved.

In addition to the problem most mortgages are sold on the secondary market in pools to investors. Mortgage backed securities are made up of groups of mortgage loans that have similar risk factors, these groups of mortgages are then bought and sold on Wall Street to investors. Mortgage backed securities are nothing new and have been around for a long time however due to this lenders are feeling the squeeze by investors not to modify existing loans. The mortgage company that the homeowner purchased the loan from may not be the mortgage company that services the loan. The loan may have been bought and sold on the secondary market several times over the course of its term. The Making Home Affordable Plan is ambiguous when it comes to guidelines revolving around mortgages such as these. The long and short of it is; these are the very homeowners that need the loan modification and due to the ambiguous nature are being left behind.