The Five C-s of Loan Modification

Access to $75 billion in federal funding for loan modifications through the Home Affordable Modification Program was a ray of sunshine in an otherwise stormy period for the mortgage industry. But, despite this positive development, the skies have not entirely cleared.

According to a recent report from the Treasury Department, only 12 percent of U.S. homeowners eligible for loan modifications under the Obama administration's housing rescue plan have had their mortgages reworked, and the industry is facing a critical situation with millions of additional mortgages on the brink of foreclosure.

The prospect of homeowners re-defaulting on their loans after receiving a modification presents an equally serious challenge. Just to give one example, The Baltimore Sun recently reported that almost 53 percent of loans modified in the first quarter of 2008 re-defaulted within six months. Regulators also have seen an increase in fraudulent modification schemes wherein consumers are promised favorable mortgage loan terms, but usually end up paying huge fees and still face the very real and very tragic prospect of losing their homes. Since February, the Federal Trade Commission has filed 19 cases related to fraudulent mortgage relief schemes designed to prey on desperate homeowners.

These are just some of the very serious challenges the industry faces in its effort to fulfill the President's mandate of having 500,000 loans modified by November 1 of this year. To date, some significant steps have been made towards reaching that ambitious goal. But meeting it will require additional commitments on the part of the industry that are designed to deliver a consistent outcome for modification activity that is optimized to meet the needs of servicers, regulators and home owners.

By carefully analyzing the current market environment, and drawing on more than a decade of experience working with some of the mortgage industry's largest players, we have identified five critical factors that need to be addressed in order to accelerate the industry's response to unprecedented demand for loan modifications. All five are interconnected and all five need to be addressed rapidly to get the program on track.

We call them the "5 Cs..."


All of the players involved in the current push for increasing loan modification activity need clarity around the overarching purpose of HAMP. Is it to keep as many people in their homes as is possible? Or, is it to execute as many loan modifications as is feasible while ensuring that the outcome of that activity is optimized to meet the needs of homeowners, fulfill obligations to investors and respond to government regulation?

Supporters of HAMP argue, quite correctly, that mortgage modifications need to be properly engineered from the outset in order to deliver the best possible outcome, and many early ones were not. Moving forward, and having learned this important lesson, the need for clarity becomes even more critical.

It is also vitally important for the industry to have clarity into the most current regulations surrounding loan modifications, which include page after page of detail covering every aspect of a modification, from monthly payments and fees to disclosures and monitoring. As this mountain of regulation continues to evolve, the industry must work to ensure its modification processes remain compliant and consistent.


No one in the mortgage industry has executed loan modifications on the scale currently mandated by HAMP, or at the volume levels suggested by borrower requests and need. That being the case, servicers are being asked to execute extraordinarily complex financial transactions without the benefit of years spent building competency in each step of the modification process.

Many servicers, especially those who understand the inherent similarities between originations and modifications, have made slightly more progress in terms of addressing the internal need for additional competency. Others who have not progressed to this level are in the position of having to "build the plane in-flight," and are attempting to develop a mastery of activities ranging from portfolio analytics and proactive borrower engagement to modification, surveillance and regulatory reporting - all while scrambling to respond to incoming borrower requests.

In order to achieve optimized results in line with the HAMP goals, the industry needs to develop a mastery of loan modifications very quickly, or seek out the guidance, counsel and assistance of qualified experts.


Capacity is an obvious challenge - especially for an industry that has suffered a near-collapse over the course of the past 18 months. With one in every 357 American homes in a state of foreclosure, and more on the verge of delinquency, borrowers are scrambling for help, phones are ringing off the hook and the industry simply does not have the resources to respond to this massive surge in demand.

While many servicers have taken steps to hire additional resources, it is also crucial that the people answering borrower calls and developing modification strategies are professionals with sufficient mortgage industry expertise, and knowledge of government regulations, to ensure that the right borrowers get the right type of assistance.

To address capacity constraints, these professionals need to be armed with the latest technology that moves away from pen and paper processes and enables the rapid analysis of borrower information in order to develop customized modification strategies. None of these components can operate effectively in a vacuum and it is only through the right mix of people, processes and technology that the industry will successfully address the issue of capacity.


While speed is of the essence, especially for a homeowner facing an imminent foreclosure, each homeowner should have confidence that their case would be treated in a consistent manner if it were to be considered by several servicers. This is also the expectation of government regulators evaluating individual servicers' response to borrower requests.

At present, there is no uniform modification process that has been agreed-upon by major industry players, with support from federal regulators. This means that one home owner could be approved for a modification by one servicer and denied by another, or could receive different modification packages from two different institutions.