Short cuts, including lack of documentation by borrowers, are crippling the Obama Administration’s loan modification program and threatening to significantly reduce the more than 650,ooo loans currently in the trial phase of the program.
The program’s shortcomings could prevent it from blunting a tidal wave of foreclosures forecast over the next year, hundreds of thousands of which could be prevented if the program worked as advertised.
After the program launched in March, Treasury guidelines were changed to allow servicers to enter loans into the three month trial phase, a period to determine whether borrowers can stay current on their new monthly payment schedule, without critical documentation like income.
One result was large numbers of trial modifications where extended to five months to give time to get documentation from borrowers. Another was that remarkably low numbers of loans have made it all the way through the trial process.
As of September first, six months after the program launched, the Obama plan had produced only 1,711 permanent loan modifications. Yesterday Treasury released its monthly report on the program and did not even mention how many more loans have been modified permanently, a glaring omission that suggests by its absence that the news is very bad. There was great fanfare when the program reached 500,000 trial mods a month ago, but not a whisper about bottom line numbers . Many are assuming the worst-that short cuts taken last summer to put pressure on services and pump up the numbers of trial mods by forgoing the paperwork are backfiring.
The greatest irony, of course, is that “no doc” or “low doc” loans got America into this mess in the first place. During the boom, originators approved loans beyond borrowers’ ability to pay because hey didn’t have a clue as to what that was. It should not have a surprise the loans went into default, nor should it be a surprise that many of the same people are trying to get a break on the mortgage payments and stay in their homes without producing proof of income and other documentation.
What’s surprising is that the Treasury didn’t learn the lesson. The housing economy and the national economy as a whole may pay the price in an additional year of depressed values and a delayed recovery.