Rx for Fed Loan Mod Program

Today's big news from Congress – the House passage of major financial reform legislation – shouldn't overshadow an important hearing Rep. Barney Frank's Financial Services Committee held earlier this week on how to minimize the damage wrought by the failures of the old order. In the face of evidence that Treasury's Making Home Affordable loan modification program is aiding only a fraction of borrowers in trouble on their mortgages, several experts who testified told federal regulators what they're going to need to do now to stop the foreclosure disaster from getting uglier. Read on for the prescription:

Deal with negative equity, or else
Laurie Goodman, a Senior Managing Director of Amherst Securities, laid it on the line: 250,000 households a month stop making mortgage payments, and while unemployment plays a role, the big reason is that many owe more than their homes are worth and therefore have few exit strategies when they do run into financial trouble. "The current modification program does not address negative equity, and is therefore destined to fail," she warned.

Bringing homeowners' debts into line with their property values can happen in a few ways, but the most sensible and effective is to...

Reduce the amount of principal borrowers owe
It's been clear for months that the Obama administration isn't interested in backing "cramdowns," which would empower bankruptcy judges to reduce the amount of principal borrowers owe on mortgages, just like they already do with other debts. Julia Gordon of the Center for Responsible Lending persisted in making the case. But that isn't the only way to shrink loan balances. Real estate finance expert Anthony Sanders of George Mason University told regulators to give banks and mortgage securities investors a real incentive to agree to cut down borrowers' debts: let them write down their losses over five years. Bruce Marks of the Neighborhood Assistance Corporation of America demanded that lenders restructure mortgages, permanently, instead of keeping the same old mortgage and temporarily lower the interest rate. And Goodman zeroed in on ubiquitous second mortgages, which have made it impossible for many modifications to go through; regulators are just going to have to tell second mortgage lenders and investors that they're out of luck and have to take a loss.

and finally...

Put an end to secrecy
Usually government programs disclose gobs of data about their activities. Making Home Affordable does not. As CRL's Julia Gordon reminded the committee, the world knows only the information Treasury chooses to disclose, and that means that groups working to help homeowners and find solutions to the foreclosure crisis don't have access to the loan-level data they need to know what kind of loan modifications are being made or how they're faring. Even the formula mortgage servicers to determine whether a borrower is eligible, known as Net Present Value, remains their carefully guarded secret. In the meantime, CRL has another idea: give borrowers who've been rejected for aid a chance to appeal.
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