Obama's Plan to Stem Foreclosures Would Do More Harm Than Good

The Obama administration is mulling a plan that would require lenders to make efforts to enroll homeowners in the government's Home Affordable Modification Program (HAMP) before they pursue foreclosure.

According to a memo reviewed by Bloomberg, the proposal "prohibits referral to foreclosure until borrower is evaluated and found ineligible for HAMP or reasonable contact efforts have failed."

If the program is implemented, banks would be unable to initiate foreclosure proceedings until they have tried to contact borrowers about HAMP at least four times by phone and at least twice by certified mail.

"Conceptually it is a good idea. Procedurally, it might create more havoc and confusion for the lenders and servicing agents due to lack of consistent processes and lack of manpower," says Dale Robyn Siegel, a mortgage broker, real estate attorney, and the author of The New Rules of Mortgages in an email.

The problem is that many borrowers who face foreclosure simply can't afford the house. Trial modifications and dragging out the foreclosure process won't do much good, other than to let some people live rent-free for awhile. "The four main reasons for foreclosures and bankruptcies are death, divorce, illness or loss of job. Recently, we must add a new one -- shouldn't have gotten the mortgage in the first place!" she says.

Forcing mortgage companies to aggressively court distressed homeowners with information about HAMP -- four phone calls and two certified letters -- will do little to help most homeowners, and will only burden loan servicers with useless bureaucracy that prevents them from devoting resources to people who need and want help.