Pace of Loan Mods Likely to Slow Down

SAN DIEGO-The pace of loan modifications is likely to slow in the coming months because of rising unemployment, according to the Mortgage Bankers Association.

The warning comes in the face of criticism from some quarters that servicers aren't working hard enough to keep financially strapped borrowers in their homes.

But the MBA told reporters at its annual convention that the government's Home Affordable Modification Program is aimed primarily at owners who cannot afford the terms of their current mortgage, as opposed to borrowers who have lost their incomes.

"We will be dealing with a different kind of borrower," said MBA president John Courson, noting that future defaults are likely to be driven by the more traditional reasons for financial stress - job loss, divorce and illness - than by the nature of the borrower's mortgage.

The Home Affordable Modification Program "just doesn't work for these people," Mr. Courson said. "You can't go to 31% if there is no income," he said, alluding to the HAMP requirement that the borrower's mortgage debt-to-income ratio can be no higher than 31%. Jay Brinkmann, MBA's chief economist, is predicting that unemployment will continue to rise until mid-summer 2010 and that mortgage delinquencies will go up until the end of the year.

And "even when unemployment comes down," Mr. Brinkmann added, "it will come down very slowly."

MBA leaders promised to put their heads together to come up with workout programs that are more suited to employment issues.

Servicers will be looking for "creative ways to help these people beyond HAMP-type modifications," Mr. Courson vowed.

Michael Young of subservicer Cenlar FSB, Ewing, N.J., offered that one possibility might be to build what he called "a loan officer link" into the process.

Under that idea, servicers would try to locate the borrower's original loan agent or broker and hire him or her to help borrowers work through the sometimes-cumbersome modification process.

"One of the most valuable lessons servicers have learned (while operating under the Home Affordable Modification Program) is that the process requires intervention," said Mr. Young, who was elected vice chairman of the group here.

Asked how much it costs to modify under the Home Affordable Modification Program, the MBA officer did not answer directly. Rather, he responded, "it costs a lot more than you think." But he added that the extra expense of using a loan officer to help borrowers may be worth it if it increases the borrower's chances of completing the process.

Under the Home Affordable Modification Program, Mr. Young said, borrowers are required to fill out no less than 16 forms. But when packages are returned, he added, 99% are either missing documents or contain errors.

One technique servicers are not likely to embrace is mediation, which a growing number of jurisdictions are requiring servicers to offer before they can begin foreclosure proceedings.

Mediation is not only "not very effective," Mr. Courson said, "it slows down the process."