Shared from the 2/6/2017 San Francisco Chronicle eEdition

Effort to prevent foreclosures back to the unknown

Picture
Nathan C. Ward / New York Times

Justina Osorio, who was one of the final participants in an Obama administration program to modify mortgage payments, stands with daughter Vivianna at their home in Columbus, Ohio.

Picture
Nathan C. Ward / New York Times

Justina Osorio and daughter Vivianna got a chance to stay in their home because of the old program.

After an eight-year run, a troubled government effort to prevent foreclosures and keep struggling borrowers in their homes came to an end in December.

What happens next will be a Trump-era laboratory experiment in how financial services companies conduct themselves when the regulatory fetters are loosened.

The expired Obama-era program — known as the Home Affordable Modification Program — was widely criticized for its poor execution. Participation was voluntary for banks, and many that opted in did so unenthusiastically. (At one bank, “the floor of the room in which the bank dumped the voluminous unopened HAMP applications actually buckled under the packages’ sheer weight,” according to a scathing oversight report.)

Consumer advocates were also not thrilled; many felt that the program did not go far enough to help troubled homeowners or hold accountable the banks that contributed to their predicaments.

But Republican-led Washington has no intention of replacing it. So now it will be entirely up to the private sector to address a lingering social ill that was brought on by the financial crisis.

Banks and mortgage lenders say they are ready to step in with their own foreclosure-prevention programs, modeled on what they learned from the Obama administration’s effort. Armed with years of new data, financial companies say they now know how to make loan-modification programs successful, for both borrowers — who want to protect their homes — and lenders, who want to limit their losses on delinquent loans headed for default.

“There’s tremendous public good in having an industrywide approach,” said Justin Wiseman, the director of loan administration policy at the Mortgage Bankers Association, a trade group. “No one wants things to revert to what we had before.”

Still, housing advocates are skeptical, and for good reason: The mortgage industry was largely responsible for the program’s shortcomings (as well as for creating the need for it in the first place). The business has long been littered with errors, confusion and outright abuses.

President Barack Obama unveiled the program with fanfare in 2009 as the mortgage crisis peaked. More than 7 percent of the nation’s home loans were seriously delinquent or in foreclosure.

“This will enable as many as 3 to 4 million homeowners to modify the terms of their mortgages to avoid foreclosure,” Obama said at the time.

But the program fell far short of that.

Banks and servicers routinely flouted the rules by rejecting eligible homeowners, processing applications at a snail’s pace and tossing people out even when they made their modified payments on time, according to a series of audit reports from the program’s regulatory watchdog, the office of the special inspector general for the Troubled Asset Relief Program.

Around 70 percent of those who applied for loan modifications were turned down. In the end, about 1.6 million homeowners had their loans permanently modified — less than half the number the program was intended to help. Meanwhile, nearly 14 million homes went into foreclosure, according to Attom Data Solutions, which tracks foreclosure filings.

At the end of last year, the program — which was always intended to be for a limited time — expired. And the mortgage industry, and even some consumer advocates, say now is the right time for the government to step away.

The housing market has stabilized. The rate of delinquencies and foreclosures is at its lowest point since 2007 and continues to decline, and home prices have risen in many places.

But even in a stronger market, there will always be some homeowners in trouble because of a job loss, illness or other setback. Before 2009, few banks had programs in place to restructure loans.

Through the program and other experiments, lenders say, they have learned much about how to make such efforts work.

“Payment reduction, more than anything else, matters the most in making a modification successful,” said Wiseman of the Mortgage Bankers Association. “It sounds like the most obvious thing in the world, but it took us six years of data and research to get there.”

The trade group convened a task force last year to develop a framework for future modifications. The proposal they came up with looks a lot like the defunct program, with one key difference: its monthly payment target.

The government’s program focused on housing debt as a percentage of a homeowner’s total income. Its goal was to set a borrower’s monthly mortgage costs at 31 percent or less of their earnings.

The industry’s recommended new system instead emphasizes payment reduction. It targets a drop of at least 20 percent in the homeowner’s monthly bill through a series of steps that include interest-rate reductions, adding years to the life of the loan, and principal forbearance or forgiveness.

Stacy Cowley is a New York Times writer.

See this article in the e-Edition Here
Edit Privacy