Feds may force mods

Friday, Feb. 26

Written 9:45 a.m. EST

Forcing HAMP: The Obama administration is considering banning foreclosures unless the borrower has been deemed ineligible for a loan modification under the Home Affordable Modification Plan.

The Treasury Department is circulating a draft proposal (called "Supplementary Directive 10-02) that would:

  • Prohibit referral to foreclosure until the borrower has been found ineligible for HAMP, or hasn't made payments on time during a trial mod, "or reasonable contact efforts have failed."
  • Suspend foreclosure sales during the 30 days after the borrower was declared ineligible for a modification, to allow time for the borrower to appeal.
  • Require servicers to "stop all foreclosure action" when the borrower is in a trial payment period.
  • Make servicers declare in writing that the borrower was ineligible for a HAMP modification before a foreclosure sale can proceed.
  • Allow borrowers to demand being considered for HAMP modifications even if they're in bankruptcy.

Under the proposal, every borrower who was 60 or more days delinquent would have to be considered for a HAMP mod "except borrowers in active bankruptcy." Servicers would have to call at least four times and send at least two letters.

The feds would require servicers to refrain from sending mixed messages by threatening to foreclose while negotiating a HAMP mod.

Barry Ritholtz, blogging at The Big Picture, calls the proposal disappointing. "The problem we have in housing is that over the past decade, 5-10 million people bought homes they cannot afford," he writes. "Many of these homes are now worth less than their underlying mortgages. The best options in these cases are: 1) A negotiated capital cost reduction (i.e,, "cramdown") with their lenders; 2) A short sale; 3) Walkaways."

A Treasury spokeswoman tells Bloomberg: "This proposal has not been approved and there are no immediate planned announcements on the issue."

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