Last November, Andrew Jakabovics and I reported that Bank of America was siphoning borrowers into its own private mortgage modification program before determining whether those borrowers qualify for the Obama administration’s Home Affordable Modification Program (HAMP), in clear violation of the bank’s HAMP contract with Treasury. And as it turns out, according to an investigation by ProPublica, this and other in-house modification programs run by the nation’s biggest banks are a substantively worse deal for borrowers than government supported programs:
A ProPublica analysis of regulators’ data shows that, compared to modifications in the government program, banks’ own modifications are less likely to reduce interest rates, less likely to defer principal and more likely to actually increase monthly payments. [...]
ProPublica’s analysis found that almost 80 percent of the government modifications reduced monthly payments by more than 20 percent, whereas fewer than 40 percent of proprietary modifications made such reductions. Fifteen percent of proprietary modifications actually increase the monthly payments, typically because the modifications added past-due interest and other fees to the loan’s principal.
HAMP has been a pretty big flop, with only $600 million of the $50 billion dedicated to the program actually getting out the door, and with more borrowers getting dropped from the program than successfully receive a permanent mortgage modification. But private modifications are clearly a bad deal, particularly if they are actually increasing the monthly amount a borrower owes! And as HAMP has failed to get off the ground, borrowers have found themselves sucked into private modifications, for lack of better options.
Private modifications currently outnumber government modifications four to one, which is just one more reason that the administration needs to be looking at ways to streamline HAMP and get more borrowers through the program successfully. The Center for American Progress, for instance, has proposed allowing housing counselors to approve HAMP modifications, and if the bank doesn’t challenge the modification in three months, it automatically becomes permanent. This would help eliminate a lot of the foot-dragging in which the banks currently engage when it comes to HAMP.
Another idea for preventing foreclosures is ramping up automatic foreclosure mediation programs, which have been successful across the country. Mediation — which means that a bank must actually meet with a borrower, face-to-face, to make one last-ditch effort at striking a deal before a foreclosure is finalized — been keeping borrowers out of foreclosure in Philadelphia, Connecticut, Maryland and New York. Alon Cohen has laid out a set of best practices for mediation programs here.