To Modify or Not
Avoiding the Traps
HE “MORTGAGE MELTDOWN” has been dissected and examined every way pos-
sible. There are many reasons for why so many loans have gone south, but we’re left with
one important question: What should we do about it now? Pressure to identify and make
changes to distressed borrowers’ loans to provide more-affordable payments comes from
many quarters. But what does that involve? Do you even have to do anything in the first
place? And if you do, what should you do? There are many different ways a loan can be
modified or changed to reduce the risk of eventual foreclosure, and each presents differ-
ent compliance challenges.
T
What Is the Situation?
Almost all statistical measures issued within the last year-plus
indicate that mortgage performance is declining across all
classifications. The OCC and OTS Quarterly Mortgage Metrics Report1 indicated that around 10 percent of all mortgages
were nonperforming at the end of the first quarter of 2009,
which was about the same as at the end of 2008. However,
serious delinquencies (loans 60 or more days past due) increased nearly 9 percent, to 5 percent of all mortgages.
The highest percentage increase in serious delinquencies
was seen in prime loans; those rose more than 20 percent
from the previous quarter, while subprime delinquencies rose
“only” 1. 5 percent. Foreclosures in process totaled more than
844,000 as various stays on foreclosure expired. In total, foreclosures increased 73 percent from the first quarter of 2008.
How to Handle This?
All very bad news, to say the least. Of course your aim is to
reduce the likelihood that your borrowers will end up in
foreclosure. But how best to do this? According to the OCC/
OTS study, the most successful modifications were those that
lowered the borrower’s monthly payment so that he or she
would have a better chance of being able to make continuing payments. That certainly seems like common sense, but
often delinquencies have been handled by either keeping the
payment steady (by freezing an adjustable rate or forgiving missed payments) or even increasing it (by capitalizing
missed payments).
Addressing this point, Comptroller John Dugan stated
that “modification strategies that result in unchanged or increased mortgage payments run the risk of unacceptably high
re-default rates. They should only be used on a case-by-case
basis where borrowers and servicers can have confidence that
the modification is likely to be sustainable.” 2
However, given that dismal economic conditions and
high unemployment are the chief causes of most defaults,
even lowering a borrower’s payment sometimes just delays
the inevitable. The borrower has already demonstrated an
inability to repay, after all. But there is a larger question at
work here: do you have to do anything at all?
Political Pressure
The short answer to that question is no. There is no regulatory
mandate or law that says, “Thou Shall Modify All Distressed
Mortgages.” But political pressure is mounting: for example,
in recent well-publicized letters, members of Congress complained to HUD about the failures of loan servicers to be
more responsive to the needs of borrowers. In addition, stories have appeared in the press about unresponsive servicers,
phone calls gone unanswered, and months-long response
times for help requests.
There have even been calls for requiring banks that
received assistance (through TARP funds or otherwise) to
participate in some of the government-sponsored modification programs, such as the Home Affordable Modification
Program (HAMP). The Treasury’s monthly report on HAMP3
