Fourth and Inches: New Mortgage Relief Guidelines Are Important but Fall Short

By Andrew Jakabovics

This article was published by the Center for American Progress.

The U.S. Treasury today released important new guidelines to mortgage service companies responsible for modifying home loans held by responsible but financially pressed homeowners under the Obama administration’s Home Affordable Modification Program, or HAMP. The new HAMP guidelines are a solid improvement for homeowners at risk of foreclosure because of a simplified application process, but the new rules unfortunately fall just short of really streamlining the process through which eligible borrowers can receive permanent changes to their loans in order to continue to pay on their mortgages and stay in their homes.

The new guidelines—known as Supplemental Directive 10-01—provide a big step forward in terms of simplifying documentation requirements and mandating a timeframe in which mortgage service companies must respond to borrowers’ requests for mortgage modifications. Yet even as the directive sets out clear obligations for timely responses from servicers—acknowledgement of receipt within 10 days of a borrower’s request for modification and a requirement for a decision on a modification within 30 days—the lack of penalties for servicer noncompliance or a true appeals process is disappointing.

Until now, homeowners seeking mortgage relief could qualify for a trial modification under HAMP based on their stated income. This meant the program could claim hundreds of thousands of households in the program—since many at-risk borrowers applied for mortgage relief under HAMP—but it also made the process of getting borrowers into permanent modifications much more difficult. The reason: Borrowers already in the trial period often have to send their documents to their mortgage service companies multiple times because the servicers say they never got the information or certain items went missing. Even borrowers who submitted full packages in their initial application for the program had to resend documents to be considered for permanent modifications, which essentially required a whole new evaluation of eligibility.

Starting June 1, full documentation—now greatly simplified as well—will be required from borrowers requesting mortgage modification under HAMP before eligibility will be determined and a trial modification offered. In theory, this should allow an easy—if not automatic—conversion of trial modifications into permanent ones. If all documentation is provided up front, then there should be no surprises as to what the borrower’s new payments will be under the program. In other words, if the only people getting trial modifications are those who can document eligibility for the program, then there should be no substantive difference between the trial mortgage modifications and permanent modifications.

Under HAMP program rules, a borrower’s modified payment is simply 31 percent of income, with the borrower’s income now verified up front. Borrowers must still make three months of payments under the trial period, but after the third payment is made, the modification under the new guidelines is still not automatically made permanent. The directive simply states that borrowers who satisfy all obligations “will be offered a permanent HAMP modification.”

This is the problem with the new guidelines. Given all the difficulties currently faced by clearly eligible at-risk homeowners so far in having servicers convert trial mortgage modifications into permanent ones, requiring an additional back-and-forth round with mortgage service companies to get to permanent mortgage relief seems unnecessary, particularly as servicers have all the necessary information to determine the terms of the modification from the beginning.

Technically, however, the trial modification is being treated as a forbearance plan—essentially an informal agreement to make partial payments of the actual amount due—and not a true mortgage modification that explicitly changes the loan terms—despite the fact that the trial has always been touted as a modification. Under the terms of trial modification before and after the publication of these new guidelines, the receipt of the first payment is considered acceptance of the forbearance terms.

For some reason, however, Treasury is unwilling to apply the same standard to the permanent modification after three months of trial modification payments, instead requiring a signed document to be returned. This means one more step in the process in which mortgage service companies can drag their feet or otherwise delay much-needed immediate mortgage relief to clearly eligible homeowners in the HAMP program.

A far better course of action would be simply to make the trial “modification” a true modification with a clause that would restore the original loan terms if the first three payments are not made in a timely fashion. Recognizing that there are small adjustments that may be made to the final payment amount, such as mortgage insurance premiums that may not have been accurately reflected in the initial trial, the modification could allow for small adjustments within the first 90 days. These adjustments, which would need to be fully documented for compliance purposes, would be treated no differently than changes to the payment amount in future years because of increased property taxes.

The new guidelines still clearly make the HAMP application process more streamlined for at-risk homeowners. The new obligations for mortgage service companies to provide applicants with timely responses should alleviate the limbo in which many borrowers find themselves after sending in documents multiple times but hearing nothing in response. But even here, Treasury could make a few important changes to the new rules. Case in point: A borrower who sends in documentation and gets no acknowledgement within 10 days—even if they can produce a delivery confirmation—must follow up by phone with the servicer. It remains to be seen what the servicer will tell the borrower other than they don’t know where it is and could the borrower please resend the package. While requiring acknowledgement is good in theory, the new guidance offers borrowers no real recourse in cases of servicer noncompliance.

The same holds true if a response to the application is not provided within 30 days. There is no independent appeals process that would independently determine eligibility and compel the modification by the mortgage service company. Under the new verified documentation track, there isn’t even a trial period until a review has taken place, so noncompliance by the mortgage service company doesn’t merely prevent conversion to permanent status—it also prevents a reduction in mortgage payments even on a trial basis.

A better way would be for independent housing counselors and other consumer advocates like attorneys to handle the mortgage modification verification process and offer trial modifications. The Center for American Progress recommended this kind of approach back in November. It is still a better policy option than the one adopted by Treasury today.

As these guidelines only come into effect in June—with voluntary compliance by servicers prior to then—we suggest that Treasury issue an additional directive to address instances of failures by mortgage service companies to comply with the timeframe as detailed in the new directives. Noncompliance should result in significant penalties to the servicers. One suggestion: Failure to comply should trigger an alternative modification structure that forgives the principal at a rate of $5,000 per business day until compliance is reached. With that kind of teeth, the new supplemental directive would protect responsible homeowners in need of mortgage relief in practice as well as in theory.

Andrew Jakabovics is associate director of housing and economics at the Center for American Progress. To read more about the Center’s foreclosure prevention and housing finance reform proposals, please go the Housing page on our website.