Missing Mortgage Modifications

Several months ago, the U.S. Treasury announced a slew of efforts to bribe encourage servicers to modify underwater mortgages. There were incentives for servicers, banks, investors and others. Virtually everyone gets a cut of the government pie. Although these foreclosure prevention efforts have gotten underway, the New York Times reports today that banks and servicers are not working quickly enough. I would offer two theories to what could be going on here.

The Times quotes Michael S. Barr, the assistant Treasury secretary for financial institutions:

"They need to do a much better job on the basic management and operational side of their firms," Mr. Barr said. "What we've been pushing the servicers to do is improve their infrastructure to make sure their call centers are doing a better job. The level of training is not there yet."

The article includes several bleak stories about dealings with mortgage servicers who simply cannot keep up with the sheer magnitude of modification applications that they receive.

Conspiracy Theory: They're Doing It On Purpose

One theory is that these servicers purposely fall behind or ignore the paperwork. I'm tempted to believe this. In many cases, I find it unlikely that modifying these mortgages would turn out to be profitable. Maybe servicers are not trying very hard to help the distressed borrowers.

This could be as simple as accidentally losing applications that you determine to be unprofitable. Perhaps their elbow slips and knocks them into the paper shredder.

Yet, it could be even less flagrant. Maybe these servicers have purposely kept their staffs too small to handle all the modifications. That way, they focus on the more profitable ones, and never get to those which are less profitable. If servicers wait long enough, then homeowners will be forced to foreclose.

For some banks, particularly those who took government bailout money, cooperating with the government modification program is not optional. If they took TARP money, they must participate in the program. But if they don't hire enough people to effectively do so, they can simply say they are doing their best, but their best isn't good enough. Since banks accepted bailout money, they must not have extra cash to hire additional employees, right?

I tend to lean towards this explanation, as I have heard a few stories of people I know trying to modify their mortgages. It sounds to me like they are getting jerked around, with little sympathy from the servicers.

Practical Theory: They Must Be Understaffed

Maybe, however, these servicers really have their hearts in the right place, but they just can't hire and train people quickly enough to catch up. Given the vast failures of so many mortgage companies, servicers are almost certainly overwhelmed with much larger numbers of mortgages under their control than they anticipated. Could it just be that they really haven't managed to hire enough people to keep up?

Possible, but this seems fishy. All those banks and mortgage companies that went bust also had employees that lost their jobs. Are they all really employed again? I find that hard to believe. If many are still unemployed, couldn't they just utilize their mortgage industry experience and step into a role at a servicer with minimal training needed? As unemployment flirts with double digits, I think servicers' argument that they just can't hire enough people sounds dubious.