Plan to mandate modification review before foreclosure more PR than help

New proposal won't help foreclosuresThe Obama administration is reportedly considering a plan that would prohibit lending institutions from foreclosing on a home before a mortgage loan modification is given consideration. This is the sort of thing that may sound good on paper (especially after "draft proposals" were obviously leaked to news media) but, upon closer inspection, I'm afraid, smells of nothing more than spin.

In that, I concur with Laurie Goodman, the senior managing director at the Amherst Securities Group who told the New York Times, " We think there is a large public relations element to this." She correctly points out that such a policy probably would have very little real-world effect.

The Mortgage Bankers Association also expressed its skepticism, an official, John Mechem, telling the paper, "Lenders generally go to foreclosure as a measure of last resort, after all other options, including loan modifications, are exhausted."

I should explain that, at the present time, lenders are "encouraged" to consider a mortgage modification when dealing with a delinquent borrower. But the fact of the matter is, as "evil" as some (OK, many) banks and lenders seem to be in many cases, there is little in the way of evidence showing that they simply do not bother to look into the possibility of a loan modification.

So, making them do it seems heavy-handed, but not likely to lead to any real change.

That's because, the real problem has always been: 1) Failure of the lending institutions to grant permanent modifications following the mandatory three month trial periods and 2) Failure in the vast majority of modifications enacted to lower the principal, thus giving the distressed homeowner more equity in the property.

Now, if the Obama administration really wants to get tough, it seems to me, it should mandate permanent modifications combined with, in some cases, a reduction in principal.

In fact, candidate Obama was in favor of giving bankruptcy judges the right to reduce principal, as they already are allowed to do on second-home (vacation homes, usually) mortgages. President Obama backed away from this when push came to shove, allowing Congress to defeat legislation that would have accomplished the task.

One proposed provision of the "plan" does seem to make sense to me: It would prohibit lenders from moving forward with a foreclosure proceeding while the homeowner is in the mandatory three-month trial modification period. The rest, not so much.

Will this idea fly?

In an e-mail to Bloomberg News, Treasury spokeswoman Meg Reilly said, "It is one of many ideas under consideration...This proposal has not been approved..."

And, I'll bet you anything, even if it is approved, a year from now it won't amount to much.

Charles Feldman is a journalist, media consultant and co-author of the book, "No Time To Think-The Menace of Media Speed and the 24-hour News Cycle." He has written about real estate related issues for several years.
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