90 days late on payments, reached 8.85 percent ,unemployment rat

Lenders Face Sanctions for Failed Loan Modifications (Update2)
Share Business ExchangeTwitterFacebook| Email | Print | A A A By Dawn Kopecki and Jody Shenn

Nov. 30 (Bloomberg) -- The U.S. Treasury Department will begin taking action against lenders that aren’t doing enough to ease mortgage payments for troubled homeowners as part of the Obama administration’s campaign to curb foreclosures.

Lenders face “consequences” that may include sanctions and monetary penalties if they fail to perform under the Home Affordable Modification Program, the Treasury said. The $75 billion program requires banks that took federal aid to help homeowners at “imminent risk” of default by lengthening repayment terms, lowering interest rates and making other changes to the mortgages to avert foreclosure.

“Now, it’s up to the banks to do their part,” Michael Barr, the assistant Treasury secretary for financial institutions, said on a conference call today with reporters.

The Treasury is also requiring some mortgage servicers to speed the decision process for changing loan terms and to submit regular status updates. Bank of America Corp. is among the worst performers in the program based upon a Treasury Department measure of trial modifications as of October. Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co. are among the best.

“We must now refocus our efforts on the conversion phase to ensure that borrowers and services know what their responsibilities are in converting trial modifications to permanent ones,” Phyllis Caldwell, who runs the Treasury’s Homownership Preservation Office, said in a statement.

Withholding Fees

The Obama administration, which set out in February to modify as many as 4 million loans, finds itself having to pressure lenders to convert more than 650,000 trial revisions made so far into permanent mortgage modifications. About 375,000 of those loans may convert into permanent repayment plans by the end of the year, the Treasury said.

Barr said the Treasury’s contracts with servicers allow for the government to withhold payments, such as $1,000 in upfront fees for each completed modification, if the companies fail to convert the modifications.

“I don’t want to get into details of the additional consequences, but we will not hesitate to use the full range of authorities that we have,” he said. Asked at least three times what the penalties might include, Barr refused to answer, saying once “I really don’t want to get into it at this time.”

The administration requires banks that received federal aid from the Treasury’s Troubled Asset Relief Program, as well as mortgage-finance companies Fannie Mae and Freddie Mac, to lower monthly payments for borrowers in need.

Confusion and Delays

Eligible loans under the program are at least 60 days past due or judged at risk of delinquency, in foreclosure or bankruptcy, and originated before 2009. The underlying property must be owner-occupied and conform to Fannie Mae and Freddie Mac loan limits, which can be as high as $729,750 in some areas. The data excludes Federal Housing Administration and Veterans Affairs loans. A borrower’s mortgage payment must be 31 percent or more of gross monthly income.

Mortgage servicers and lenders have struggled to gather the necessary paperwork from borrowers and complained of confusion and delays in how the government sets rules for the programs, according to industry testimony before Congress this year.

“Overall, I am impressed with how much these servicers have accomplished operationally given the newness of the program and the need to design programs, set up systems and train people,” said Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago. “Given the large amount of trial modifications that have been started over the past two months, we may not have a clear picture on the conversion success rate until early next year.”

Swat Teams

Caldwell will be heading Treasury “swat teams” visiting the offices of the largest loan servicers this month. She and Barr said on the conference call that borrowers need to step up their efforts to make the Home Affordable program work as well.

About 37 percent of the 375,000 homeowners potentially eligible to convert to permanent modifications by yearend have submitted only a portion of the documents needed, while 20 percent haven’t submitted any paperwork, according to Caldwell. Most borrowers in the program are “paying and paying on time” on their reworked bills, Barr said.

The Treasury plans to begin releasing data in December on how banks rank in making trial modifications permanent. The modification program was announced in February as a way to combat a surge in foreclosures that has pushed property values lower and curtailed economic growth. The program has been hampered partly by a rising unemployment rate that reached a 26- year high of 10.2 percent in October.

Unemployment, Foreclosures

The foreclosure rate as a result jumped to a record 4.47 percent in the third quarter from 3.3 percent at the end of last year, according to Mortgage Bankers Association data. Seriously delinquent loans, those at least 90 days late on payments, reached 8.85 percent from 6.3 percent at the end of 2008.

The Mortgage Bankers Association, the industry’s largest trade group, has said foreclosures won’t peak until unemployment rates crest, some time in the second half of next year.

Robert Davis, executive vice president of the American Bankers Association in Washington, said yesterday that unemployment is “the primary driver of defaults right now.” He said he was “puzzled” by the stepped-up pressure.

Cash Incentive

One purpose of the trial period “is to protect the taxpayer by making sure these loan modifications will work before anything is paid out to the lender,” Davis said. “Suddenly, for that to become a measure of bad performance when institutions are doing everything they can, is just baffling.”

The administration’s initiative provides a cash incentive of $1,000 to the mortgage servicer once a loan is converted from a trial to a permanent modification plus annual payments of $1,000 for as long as three years provided the loan remains in good standing.

Bank of America has started trial modifications on 14 percent of its eligible loans as of October, according to the Treasury. The Charlotte, North Carolina-based bank, the largest in the U.S. and the biggest mortgage servicer, has 990,628 eligible loans, a greater total than any other company on the Treasury’s list. A spokesman for Bank of America, Dan Frahm, has said the eligibility data may be overstated.

“As many as one in three of those borrowers listed as eligible for the program will not actually qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31 percent or is unemployed,” Frahm said in a Nov. 10 interview.