Mark Winston Griffith

Mortgage Industry Servicers Are Failing to Service Homeowners in Need

As the subprime and foreclosure crises continues to unfold, attention is increasingly being paid to the role of servicers - the institutions responsible for managing the loan repayment process - in modifying the terms of mortgages destined to go sour.

This week the mortgage industry, nudged by the Bush administration, announced Project Lifeline which would theoretically stop the foreclosure clock for delinquent borrowers for thirty days in order to give them an opportunity to work out a modification agreement with the servicer.

The good news is that the industry has finally recognized that you won't be able to stop the foreclosure bleeding by simply helping out borrowers who are current on their loan payments.

However, Project Lifeline has met with wide skepticism, and not just because this is a "voluntary" program offered by servicers. Although the servicers are apparently making a stronger effort to reach out to borrowers, only a fraction of struggling homeowners are working out loan modifications with their servicers. Furthermore, it's still unclear if the "modifications" being offered actually include significant reduction of the loan balance and monthly payments, which is what is most desperately needed. There is speculation that many of the "modifications" being claimed are superficial and won't ultimately enable the borrower to stay in their home. The mortgage industry's Hope Now alliance, by their own reporting, revealed that the "help" they have been giving borrowers was mostly temporary repayment plans.

Perhaps the most stinging indictment of the government's and industry's foreclosure prevention efforts came from, of all places, the New York State Banking Department, earlier this month. The Banking Department issued a report which said that "7 out of 10 seriously delinquent borrowers are not on track for any loss mitigation option...and that the rising number of loan delinquencies are outpacing the increase in loss mitigation efforts."

The State Banking Department also reported that "actions by homeowners, not servicers, have prevented the most foreclosures."

But perhaps the most sobering news were the Banking Department's conclusions that "the refinance option has nearly evaporated" because many people owe more than their home is worth or simply can't afford to pay off their existing debt at any price.

Furthermore, their report found that a "significant percentage of subprime adjustable rate loans are delinquent before [emphasis mine] they experience payment shock from their first adjustment." In fact the underwriting standards of the entire industry have come under attack with the recent news that delinquencies are also rising among prime loan borrowers.

This should quiet all the voices that have been claiming that the foreclosure crisis has been caused by borrower greed and lying.

Mark Winston Griffith: Author Bio | Other Posts
Posted at 7:42 AM, Feb 15, 2008 in Economic Opportunity
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