Real Estate & Mortgage Insights

Can Government Make More Loan Modifications Ahead of the Next Foreclosure Wave?

The $75 billion Home Affordable Modification Program (HAMP), a creation of the Obama administration, has aimed to lower the monthly payments of struggling homeowners in order to save the country from more massive foreclosure rates. Unfortunately, the consensus so far is that it has not been terribly effective; only 110,000 homeowners have seen their trial modifications made permanent, meaning the majority of the program participants are still in danger of reverting back into default.

Now millions more foreclosures are being forecasted for 2010 as certain types of exotic loan rates are poised to reset this year. HAMP was originally designed to save several million homeowners from losing their homes, but so far there are only 902,620 borrowers enrolled in the trial program.

Trying to stay ahead of the wave, the Treasury Department announced some new rules recently that should increase the number of trial modifications being converted to permanently changed loans. In order to begin the loan modification now, borrowers must first provide two pay stubs, an application form that shows proof of financial hardship, and a form that allows the mortgage servicers access to the homeowners� tax returns.

This should speed up the process significantly as in the past loan servicers have often granted trial modifications simply based on stated income levels, without any documentation. Then when it comes time to convert the trial payments to a permanent modification, it takes too much time to dig up the actual paperwork and verify it. And sometimes it turns out the borrowers are not eligible for the permanent change because their real income does match what they said they earn.

"Were there some struggles with documentation? Absolutely," said Phyllis Caldwell, chief of Treasury's Homeownership Preservation Office, during a phone call with reporters. "Are we learning from those lessons? Absolutely."

She added, "We want this to be about payment relief, not about chasing documents around everywhere."

Now all the paperwork must be handed in to even be considered for a trial modification of lower payments. As long as borrowers make their three trial payments on time, they should automatically qualify for the permanent modification, which will streamline the process and hopefully increase the success rate of the program.

"This more robust requirement of upfront documentation will make it easier and quicker to convert trial modifications to permanent modifications and enable servicers to use their resources more effectively," according to the Treasury report.

It is interesting to note, says Assistant Treasury Secretary Herb Allison, that in recent months the problem with the program has shifted from just getting lenders and homeowners to participate to now trying to get trial loans made permanent. The numbers show that he is right. Data from December shows that borrowers are being approved for trial modifications at a much higher rate. Perhaps lenders are feeling more cooperative as they consider the next flood of foreclosures coming down the pipeline.

The new documentation rules go into effect June 1.