Treasury Modifies Mortgage Modification Program Paper Trail

The Obama administration's foreclosure prevention effort through the Treasury's mortgage modification program isn't going as well as hoped. Last month, I reported that it had a mere 1% success rate thus far. I wish I could calculate its success through December, but as I mentioned in my past post, I can't. The Treasury has released some new rules this week that it hopes will help the effort. While I'm not convinced it will get its rate of success much higher, it should make for a more efficient process.

No More Lost Docs?

Here's what the new rules say about how servicers should collect documents going forward:

Supplemental Directive 09-01 gave servicers the option of placing a borrower into a trial period plan based on verbal financial information obtained from the borrower, subject to later verification during the trial period. Effective for all trial period plans with effective dates on or after June 1, 2010, a servicer may evaluate a borrower for HAMP only after the servicer receives the following documents, subsequently referred to as the "Initial Package". The Initial Package includes:
- Request for Modification and Affidavit (RMA) Form,
- IRS Form 4506-T or 4506T-EZ, and
- Evidence of Income

For starters, it was crazy that these modifications could enter trial period based on verbal information only. That means people who potentially could not have afforded the modification in the first place could have simply claimed a higher income than they could actually prove in order to stay in their defaulted homes a little longer. They could have then lived in that home for months during the trial period before re-defaulting.

This change should have two effects. First, I would expect it to take much longer to get trial modifications, since documents must be provided and verified. That, after all, is what's making permanent modifications so difficult. And that leads to the second effect -- it should significantly decrease the number of trial modifications. What we'll have now is a lower percentage of applicants qualifying for trial modifications, but likely a very similar percentage qualifying for permanent modifications.

Will this eliminate the issue of servicers "losing" documents? I wouldn't count on it. If this was really a major problem before this week's changes, it will remain a problem. Now, instead of claiming that documents were lost during the trial period, servicers can just say they didn't receive or haven't yet processed all the documents for the trial modification instead. I'm not sure why anyone believes the requirement that these documents are received sooner will suddenly result in servicers acting any more responsibly, if they acted irresponsibly in the past.

Resolving the Trial Period

The second part of the revised rules has to do with all of those modification program participants suck in the trial period. The Treasury wants those 787,231 active trial modifications (through December - .pdf) resolved. After all, of the 902,620 trial modifications offered since the program started last spring, only 112,521 have been made permanent.

It intends to do that by essentially telling servicers to either make the modifications permanent, or end them. If the documentation isn't up to par, then the trials should fail. But it also relaxes the documentation requirements slightly. For example, if a "Hardship Affidavit" has not been submitted, but the trial is otherwise successful, it can be made permanent.

I think this will have two sort of obvious results: some modifications will be made permanent sooner, but probably more trials will be cancelled sooner. So we'll see more foreclosures hitting the market more quickly than if these trial modifications had remained in limbo for longer. I think that's actually a positive outcome, because if these modifications were destined for failure, at least we'll know that sooner than later.

Overall, these changes to the modification effort appear sensible. But I'm a little doubtful that we'll see many more permanent modifications overall as a result. If anything, modifications that would have been made permanent eventually will do so more quickly. But the other side of the coin is that we'll see the failures more quickly too. Still, both those outcomes are more desirable than program participants being stuck in trial modifications indefinitely.