Regulation Takes a Toll on Mod Conversion

NEW YORK-Concern that well-intended regulations requiring careful evaluations of more documentation will have a counter-effect on industry efforts to expedite loan modification processing is growing.

Insiders caution that since quantity and quality not always go hand-in-hand the industry needs to focus on long-term solutions.

The last addition to their worries is the Home Affordable Modification Program guidance update 10-01, which is getting very mixed reviews.

Mark Compton, Servicing and Default Manager, Strategic Consulting Services, Lender Processing Services on the other hand, says 10-01 does not represent a challenge or a big change in the trenches. Many servicers already have been screening future default risk when reviewing loan modification candidates by requiring full income and employment documentation upfront - which is now required by HAMP. So according to Mr. Compton, the June 1 deadline when all lenders and servicers are required to comply with that requirement is just a technicality.

A 27-year mortgage veteran who chose to remain anonymous told this publication that the most recent 10-01 Home Affordable Mortgage Program update is one of 9 changes and about 65 enhancements since it was launched in March 2009. And all these changes are not so easy for servicers to execute, the source said, in part because "Treasury has two separate departments, one for policy and one for execution. And they do not seem to communicate enough." Maybe Treasury should learn from Fannie Mae and Freddie Mac, "who are a little better," because regulatory changes are not as hard to implement, the source said. "Even if servicers tried really hard to comply with every HAMP requirement, it is not improbable for them to not be able to comply."

Others within the industry have made politically correct staements that sound contradictory. Hope Now executive director, Faith Schwartz, called the recent Treasury update of the guidance for servicers regarding HAMP requirements "another good step forward" while in the same press release she noted that her agency expects the number of new trial modification starts to "somewhat decrease" since verbal information no longer is accepted. The agency recognizes that borrowers that qualify for a trial modification are required to provide additional documentation to receive permanent status, so "incomplete document packages remain the number one hurdle to permanent HAMP status." Nonetheless, Hope Now also said that if a borrower does not meet trial modification requirements servicers will be able to more quickly pursue other foreclosure prevention solutions.

Other industry veterans, like Steven Horne, founder and president of Wingspan Portfolio Advisors LLC, Carrollton, Texas, say the public's expectations about the mortgage modification conversion rate, either to the trial or permanent status needs to be more realistic and stay away from possible sanctions and fines against servicers who fail to meet obligations. "Although the Treasury's frustration is understandable, but I think it is misplaced because it's kind of like beating your horse because it can't fly." After all, servicers are following the rules and complying with HAMP requirements, which were set up for them and are, by general consensus, far from perfect, to say the least, he said.

"It's no secret that servicers are in charge of dealing with all these defaults, modifications and REOs, they are dealing with unprecedented volume ... so how do you handle that in an efficient manner? It's hard to do," says the president of Clear Capital, Kevin Marshall. In addition, he agrees they are under pressure to perform better and faster, even though they are handed more rules to follow and documents to fill out. More regulation and changes in the regulatory landscape both at the state and federal level require servicers to pay attention and change their processes. These well-intended regulations are bound to cause a slowdown in the servicer's ability to address loan modifications, short sales and loan workouts, he adds. "I'm not saying we should not change processes, we need to adapt processes and systems, but it's got to be part of the conversation that when there's change it will slow things down."

At the same time the mortgage industry is dealing with losses that are related to the current recession and the goal to keep people in their homes, and during such hardships people tend to embrace a protectionist approach to business, he said, part of which is the debate about appraisals and BPOs for instance. "I often think it's unfortunate we're spending so much energy debating who should do evaluations and win." Quoting from a case study by Theodore Levitt published in the 1960s, "Marketing Myopia," Mr. Marshall said in the early 1900s when the auto industry started booming, the railroad industry went into a protective mode instead of going pro-customer, and it backfired on them because they should have focused on what is best for people to travel and move goods.

"As we work with lenders, originators, appraisers, real estate agents, let's focus on what's good for the customer, because if we do that, we as an industry will do well."

Right now, however, "the public" is far from pleased with servicers who often are accused of noncompliance with HAMP requirements, even fraud. Customer advocates like Ohio attorney general Richard Cordray who has initiated a handful of lawsuits against servicers at yearend 2009 alleged "unfair loan modification agreements" and "inadequate, incompetent customer service to Ohioans" in a lawsuit against Barclays Capital Real Estate dba HomEq Servicing, a HAMP participant.

The lawsuit - which a HomEq spokesperson called "meritless" - claimed that at-risk-of-foreclosure homeowners "were forced to enter into one-sided agreements," that released HomEq of all liabilities requiring borrowers to wave their defense rights and pay additional fees. Mr. Cordray stated that "many servicers" are aggravating the crisis through noncompliance and excuses. Prior to that Mr. Cordray had filed at least three similar lawsuits. He told the media he wanted to make sure servicers are not just paying lip service to the loan modification process.

An Americans United for Change telephone poll with 1,000 prospective 2010 voters found that 70% believe the country's financial system needs either major reforms or a total overhaul. People on "Main Street" support the closing of the loopholes that allow banks to avoid regulation, and a consumer protection agency that will "crack down on abuses committed by credit card companies and mortgage lenders," says AUC's Tom McMahon.

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