Is Permanent Relief Too Good To Be True?

Today’s announcement that the Obama Administration plans on forcing mortgage companies to permanently reduce monthly payments for troubled homeowners was met by a mixed reaction.  While the action’s sponsor, the White House, said one thing, many others took a more realistic wait and see attitude. 

The Department of Housing and Urban Development’s (HUD) new initiative is part of the Administration’s efforts to provide relief for homeowners who are laboring to pay their mortgages, and is another piece of the effort to stabilize the housing market.  The initiative, according to HUD, wants to extend to those already receiving trial modifications to their home loan, a permanent modification to their mortgage.  In simple language, what does that mean?  A lower payment. 

While borrowers have understandably embraced the new program, mortgage lenders aren’t nearly as willing.  To ensure their participation, the Administration outlined steps to hold their feet to the fire.

Servicer Accountability

As part of the Administration’s ongoing efforts to hold servicers accountable for their commitment to the program and responsibility to borrowers, the following measures will be added:

• Top servicers will be required to submit a schedule demonstrating their plans to reach a decision on each loan for which they have documentation and to communicate either a modification agreement or denial letter to those borrowers. Treasury/Fannie Mae “account liaisons” are being assigned to these servicers and will follow up daily as necessary to monitor progress against the servicer’s plan. Daily progress will be aggregated by the end of each business day and reported to the Administration.
• Servicers failing to meet performance obligations under the Servicer Participation Agreement will be subject to consequences which could include monetary penalties and sanctions.
• The December MHA Servicer Performance Report will include the data on permanent modifications as well as the number of active trial period modifications that may convert by the end of the year if all borrower documents are successfully submitted, sorted by servicer and date.
• Servicers will be required to report to the Administration the status of each modification to provide additional transparency about situations where borrowers face obstacles to moving to the permanent phase.

While the new initiative is certainly welcome by homeowners whose mortgages have become a greater burden than they can bear, its viability is only as good as the rules it is guided by.  The process is riddled by paperwork, and paperwork and the U.S. government sometimes don’t mix too well.   Additionally, while the gov’t plans on using a carrot and stick approach when dealing with lenders, only time will tell how well their daily monitoring works in practice.  

Former Chief Credit Officer for Fannie Mae, Edward Pinto, calls the new initiative’s goals “a pipe dream”.  What do you think?  Is it simply eyewash?  Or, is the initiative good for homeowners and the economy?

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