The Obama administration today announced a new campaign to get mortgage companies to lower mortgage payments for struggling homeowners – and part of the strategy is some old-fashioned "name and shame."
To date over 650,000 homeowners have entered into trial modifications under the Treasury Department's housing relief plan – a ratio of about one in five eligible borrowers. But the administration – frustrated with the performance of mortgage companies thus far – will now try to ratchet up the pressure on servicers, especially with 375,000 of these trial modifications set to convert to permanent ones by year's end.
The administration today warned companies that failure to meet performance obligations under the program could result in fines and sanctions.
"In our judgment servicers to date have not done a good enough job of bringing people a permanent modification solution," said Treasury Assistant Secretary for Financial Institutions Michael Barr. "The number that have been converted to permanent modifications thus far is low – and servicers need to do better."
"Servicers who don't meet their obligations under the program are going to suffer consequences," he warned, adding, "We will not hesitate to use the full range of authorities we have to ensure compliance with the program."
However, Barr repeatedly declined to detail what these additional consequences would specifically entail. Later today Barr and TARP chief Herb Allison will hold a call with mortgage servicers to emphasize this message and ask them to meet with Treasury officials in person next week in Washington.
Mortgage servicers will have to submit a schedule for their plans to reach a decision on each loan and to communicate the decision to borrowers – daily progress will then be aggregated at the end of each business day and reported to the administration. Treasury's next report on servicer performance, set to be released sometime in the next two weeks, will include current data on permanent modifications as well as the number of active trial modifications that may be converted by year's end if all required documents are successfully submitted by borrowers.
In other steps to make the conversion transition easier and more transparent, Treasury today also extended the period for trial modifications started on or before Sept.1 to give homeowners more time to submit required information. The department also said it's "streamlining" the application process to simplify it and reduce paperwork, as well as "enhancing borrower resources" on the government's Making Home Affordable Web site.
To coordinate these new conversion efforts, Treasury today named Phyllis Caldwell as chief of the department's Homeownership Preservation Office.
"We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners," Caldwell said in a statement. "We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones."
Last spring, the administration tagged $75 billion in taxpayer funds to help quell the home foreclosure crisis, but officials say banks aren't doing their part to help the millions of Americans who risk losing their homes.
For nearly a year the administration has been offering cash to banks if they will modify mortgages to lower payments for homeowners in crisis.
Michael Barr, assistant director for financial institutions for the Treasury Department told the New York Times in a recent interview that banks are not doing a good enough job.
"Some of the firms ought to be embarrassed and they will be,' Barr said.
Members of the administration aren't the only ones frustrated by still dismal foreclosure rates.
Just days ago, a judge in Long Island, N.Y., simply nullified the mortgage of one East Patchogue family, after accusing the bank of treating them with "duplicity" and a "condescending attitude."
The judge lambasted the bank for refusing at every turn to renegotiate the terms of the family's loan.
"We just wanted to modify the loan, that's all," said Kimberly Horoski, who, with her mother and father, had tried to get the mortgage modified. "I don't think that was asking too much."
The Obama administration's plan was supposed to provide incentives to banks that would compel them to modify loans for struggling homeowners and reduce mortgage payments.
But economists say the incentives haven't worked.
That's because sometimes financial institutions can make a bigger profit by letting a home fall into foreclosure, rather than by renegotiating the terms of the mortgage, through steep fees levied on homeowners as the foreclosure process drags on.
Phyllis Caldwell, the head of the Treasury's Homeownership Preservation Office, said in a statement released today that Treasury is now focusing its efforts on converting temporary loan modifications into permanent conversions by ensuring that "borrowers and servicers know what their responsibilities are."
Peter Morici, an economist at the University of Maryland, said the government's mortgage program was "ill conceived" and "poorly executed," and the rising unemployment rate is making a bad situation, worse.
"Interest rates are at rock bottom levels," he said. "If folks could re-finance, they would have already. The White House can't change that and casting blame on the banks won't help."
He said the incentive program is futile because banks often sell off the mortgages to investors, so the only real way to fix the foreclosure crisis is to hold Wall Street's feet to the fire.
Until that happens, economists say, naming and shaming may not make much difference.