Rep. Barney Frank, who chairs the House Financial Services Committee, and Sheila Bair, who chairs the Federal Deposit Insurance Corporation, have assailed Hope Now members for dragging their heels on modifying distressed borrowers' loans.
Under new guidelines designed to blunt that criticism, Hope Now Alliance members are to contact borrowers at least 60 days in arrears on their mortgages to outline ways to avert foreclosure.
Borrowers at "probable" risk of defaulting on subprime, or risky, adjustable-rate mortgages will be contacted 120 days before the interest on their loans is due to reset to a higher rate, according to the new guidelines unveiled Tuesday.
Alliance members further agreed to acknowledge within five days borrowers' applications for help with their loans, and to provide a final answer within 45 days.
The latest steps are designed to respond to complaints that mortgagors have not responded to struggling borrowers' phone calls or letters and that responses -- when forthcoming -- have been slow and unclear.
The Bush administration welcomed the announcement.
The new procedures "will allow even more homeowners to get help faster," said Robert Steel, the Treasury undersecretary for domestic finance. "We are pleased to see the alliance members continually making improvements and expect them to maintain their efforts."
Consumer advocates were less sanguine.
"Given borrowers' difficulty in getting a straight answer about their status and whether the mortgage lender would entertain some modifications so they can afford to stay in their homes, providing clearer answers and a clear timeline should help," said Allen Fishbein, a credit and housing policy director at the Consumer Federation of America.
"But remember, they're only guidelines," not legally binding commitments, Fishbein said.
Also in question is the type of help borrowers are to receive. For the most part, lenders have offered workouts, which typically involve rescheduling payments. The size of the mortgage remains unaltered.
In consequence, and as foreclosures push down home prices, even borrowers not in arrears risk being saddled with loans greater than the market value of their home. In turn, they face an increasing danger of falling into arrears.
"Foreclosures have been feeding on themselves," Fishbein said. "Workouts are not of particular help if all you end up doing is making payments on a loan you can't afford."
The Hope Now guidelines remind members to discuss not only workouts but also loan modification, in which the size of the underlying mortgage could be renegotiated and brought in line with depressed housing prices.
Tuesday's agreement further suggests that lenders entertain "short sales," in which the borrower is allowed to sell the home at fair market value and the lender accepts the proceeds as full repayment, even if the sum thus raised is smaller than the outstanding balance on the mortgage.
In short sales, borrowers still must relinquish their homes but they avoid the emotional and logistical nightmare of being thrown out. Further, they minimize the resulting damage to their credit history, on which hangs their future access to loans, insurance and even employment.
Hope Now has said its members -- nearly the entire U.S. mortgage industry -- has helped 1.6 million borrowers since July 2007 and has completed nearly 1 million loan modifications between last October and March.
The top U.S. banking regulator poured water on those claims.
The Office of the Comptroller of the Currency last week issued findings that coalition members used varying definitions of what constitutes a loan modification, effectively inflating the number of borrowers they claimed to have helped.
The regulator conducted its own study, based on raw data collected from nine large banks representing 45 percent of the U.S. home loan market, and found that they had provided fewer than 250,000 loan modifications during the same period. It also found that the banks were understating the rate of newly initiated foreclosures.
Frank, the House financial services chairman, said the revelations showed that while Hope Now remains an initiative "worth trying," more aggressive action is needed. Legislation pending in Congress would provide further incentives to write down loans to market value.
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Albion Monitor June
24, 2008 (http://www.albionmonitor.com)
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