Tough Talk Is Not Enough on Loan Modifications

Today, the Obama administration announced that it is stepping up efforts to pressure mortgage companies and banks to reduce payments for homeowners facing foreclosure.

As double digit unemployment becomes the major driver of foreclosures and as the vast majority of adjustable rate mortgages have yet to trigger, the White House is finally getting the message that news footage of families being tossed to the curb during the holiday season will not help Democrats going into the 2010 election cycle.

Tough talk is certainly welcome, but the Obama team doesn’t seem to understand that banks can’t be talked into or even shamed into doing the right thing. The majority simply don’t want to modify loans, and they will not unless they are ordered to do so by a judge.

Right now there are two federal programs that are supposed to be helping families facing foreclosure. But the programs are fatally flawed, because they rely on the goodwill of banks to modify mortgages and make them workable. Not only is foreclosure sometimes the best option for banks, but banks also make big fees when families are delinquent.

To no one's surprise, the Congressional Oversight Panel released a report in October showing that these programs are failing. Fewer than 2,000 of the 500,000 loan modifications then in progress had become permanent under the program, and only a handful lowered the principle. The pace of the Treasury Department programs is so slow that most people are being foreclosed upon before they are even able to apply. Treasury’s own projections would mean that, in the best case scenario, fewer than half of the predicted foreclosures would be avoided.

The administration’s efforts so far are too little too late and the devastation left by this failure is mounting. Over the Thanksgiving weekend, I spoke to a neighbor facing foreclosure who has had an endlessly difficult time getting her mortgage firm on the phone. Each time she succeeds in speaking to a real person, she is told a different story about what paperwork is allegedly missing. Unable to work something out, she was served notice of a court date in January.

New data shows 14 percent of homeowners with a mortgage were either behind on payments or in foreclosure at the end of September, a record level for the ninth straight quarter. While tough talk is welcome, President Obama must champion and push through Congress real reform measures that will result in meaningful modifications that families can afford. We need a national foreclosure prevention program and it could be modeled on one started last year in Philadelphia. That program doesn’t just talk tough but it forces mortgage companies to submit to court-supervised mediation with delinquent borrowers aimed at striking an equitable resolution before they are allowed to proceed with the sale of foreclosed homes. Left-over Troubled Asset Relief Program (TARP) bailout funds could also be used to help families facing foreclosure.

Without this type of aggressive action, millions more people who have already lost their job will now lose their home, and we can be sure that these people will be voting for change next November.