The Treasury Department's latest attempt to encourage servicers to modify more loans is unlikely to work because it does not address key underlying problems, sources said.

Treasury officials on Monday vowed to publicly identify servicers in the Home Affordability Modification Program (HAMP), that are not doing enough to help struggling homeowners. Those firms could be subject to undefined penalties.

But observers described the administration's action as window dressing, saying it is rising unemployment that is preventing servicers from converting more trial modifications into permanent, affordable loans.

"The major problem right now is, it was designed for a different problem than we have now," said William Longbrake, a director of the $1.2 billion-asset First Financial Northwest, who helped design HAMP. "The program really needs to be redesigned to deal with problems created by unemployment and loss of income rather than poor underwriting and unaffordable interest rates."
Since the Treasury announced Hamp on March 4, 650,000 borrowers have gotten trial modifications that are converted to permanent, new loans after a borrower makes three consecutive payments.

But only 2,000 are likely to be made permanent, according to a congressional oversight board. The Treasury is expected to release its own data on permanent modifications this month, and a Treasury spokeswoman said Monday that the figure would be in the "tens of thousands."
Before the data's release, the Treasury said, it would require the largest servicers to submit schedules of their plans to make trial modifications permanent. Servicers are to be required to supply additional documentation on the status of each modification as well as data on situations in which trial modifications did not result in permanent ones. The Treasury also plans to appoint a liaison to monitor servicers' progress.

Servicers failing to meet obligations will face "consequences, which could include monetary penalties and sanctions," according to a Treasury press release.

Michael Barr, the Treasury assistant secretary for financial institutions, declined to elaborate on potential penalties beyond saying that the administration would release data to the public specifying which servicers are falling behind.

Public embarrassment would encourage servicers to work harder on the issue, he said.
"In our judgment, servicers to date have not done a good enough job of bringing people a permanent modification solution," he said in a conference call with reporters. "The number of conversions to permanent modifications thus far is low, and servicers need to do better."
But past attempts to use public disclosure have failed to yield results. The Treasury has released several report cards on Hamp that showed Bank of America Corp., for example, lagging behind other servicers in offering trial modifications to eligible borrowers. Yet the releases have not appeared to hurt BofA or spur it to make more modifications.

The Treasury has also failed to address legitimate issues with the program, servicers said. Since its inception, they have said that the paperwork is too complicated and that many modifications do not become permanent because borrowers do not complete it. Treasury officials said 37% of those eligible for conversion by yearend had submitted only partial documentation and 20% more had submitted none of the required documents.

Steve Nesmith, a senior vice president and assistant general counsel for strategic and government initiatives at Ocwen, a servicer participating in Hamp, said modifications have been bogged down by difficulties in getting paperwork from borrowers. He predicted that the program would be revamped as the housing market declines even more next year.

Though "the administration has made course corrections since the program has started," he said, "I think the program is definitely going to have to evolve with what I believe is a very fragile housing recovery and a very fragile housing economy."

The overarching problem, observers said, is that many borrowers have lost their jobs and are unable to find new ones.

"There are not more partial fixes to the plan," said Mark Zandi, the chief economist and a co-founder of Moody's "They are getting to the point where they need a new plan."
Barr said the administration is working on a plan to address rising unemployment but would not discuss its details.

Sources said the administration is considering options such as extended forbearance and unemployment benefits.

Brian Gardner, a political analyst at KBW's Keefe, Bruyette & Woods, said the administration's effort was more about improving political perceptions than addressing the underlying issues.

"At some point," he said, "the administration, the Congress and the industry have to ask and discuss the question, whether principal writedowns aren't the way to go because I think they are still kind of nibbling at the edges."

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