Tuesday, Dec. 8
Written 9:45 a.m. EDT
HOBBLED HAMP: Under the federal government's mortgage modification plan, called HAMP, distressed borrowers are given three-month trial modifications. During the three-month trial, borrowers' monthly payments are reduced to about 31 percent of pre-tax income. For the trial mod to become permanent, borrowers have to turn in a mound of paperwork, including income verification, tax returns, and proof that they still live in the house.
I've heard from borrowers who complain that they turn in their paperwork, but lenders lose it repeatedly. Some borrowers say they made three or four or five payments on time during the trial period, then were denied permanent modifications without sufficient explanation.
Last week, I opined that lenders just weren't trying hard enough, partly because they want to sabotage HAMP so they can confirm their Randian anti-government philosophies. Today, a Bank of America executive is making a convincing case that I'm wrong: that BofA is trying hard to make HAMP succeed, and that the bank has a financial stake in HAMP's success.
Jack Schakett, BofA's credit loss mitigation strategies executive, is in charge of the bank's foreclosure prevention programs. In prepared testimony before the House Financial Services Committee, Schakett says today that the bank makes extraordinary efforts to collect customers' paperwork. But, he says, many customers don't send it in, or the paperwork differs from what the customers told BofA reps on the phone.
Schakett says Bank of America has about 65,000 customers who have made more than three trial modification payments on time. Their trial mods are set to expire at the end of the year. The borrowers have three weeks to submit the required paperwork.
Of these 65,000 borrowers, 50,000 "have either not submitted some or all of the required documents or have submitted all their required documents, but the documents reveal discrepancies that require an additional response from the customer," Schakett says.
Now, if you're as cynical as I am, you assume that these 50,000 people haven't submitted complete paperwork because they'll get caught lying. When they talked a BofA rep into approving a trial mod, maybe they lied when they said they still live in the house, or maybe they lied about income. But that's not Schakett's hypothesis. He speculates that the fault might be "ineffective communications with customers, shortcomings in document maintenance, misunderstandings about program requirements, and the inability to comply by some borrowers."
We'll soon find out if Schakett is right. Last week, the federal government threatened to shame foot-dragging mortgage servicers, and BofA responded with an aggressive reach-out program for those 65,000 borrowers. Last week, the bank sent all of those borrowers an express mail envelope with urgent request for the required documentation. The mailing contained a prepaid express mail return envelope. BofA will send another round of express mail envelopes next week to those borrowers have haven't yet replied.
Someone on the House panel is likely to ask why BofA didn't try this earlier. It's a fair question. But it looks like the feds light a fire under BofA. Let's see whether this outreach project succeeds. I have a hunch that a lot of these folks won't reply, for the cynical reasons that I outlined.
Schakett gently makes a case that HAMP has limited ability to help distressed borrowers under the current rules. He says BofA has about 600,000 customers who are, at first glance, potentially eligible for modifications under HAMP. But appearances are deceiving. It turns out that roughly 55 percent of those 600,000 customers are disqualified from eligibility for HAMP mods, either because the home is no longer their permanent residence, or they're unemployed, or their current mortgage payment is less than 31 percent of pretax income.
The Treasury Department is working on ways to expand HAMP to help unemployed homeowners as well as those who don't qualify because their house payment is less than 31 percent of gross income. Helping the unemployed will probably be fairly straightforward. But the latter problem -- people with house payments under 31 percent of income -- will be a knotty problem.
It will be difficult to solve because many of these homeowners are over their heads with credit card or auto or student loan debt. They didn't buy too much house -- their house payments are less than 31 percent of income -- but they owe too much money with other kinds of debt. Low- to moderate-income people tend to get in trouble when all of their debt payments -- mortgage, credit cards, auto and education loans, plus alimony and child support -- exceed 45 or 50 percent of income.
In such cases, why should mortgage lenders lower their customers' house payments, without requiring credit card and auto loan companies to modify those loans, too? It will be hard for all the players to reach consensus.