The failure of yet another voluntary plan to rework mortgages is likely to renew a push for bankruptcy reform and other measures to force lenders to compromise with borrowers.
Though the Treasury Department remains committed to its Home Affordable Modification Program, hosting a meeting with servers on Tuesday, observers predicted that plan, like other voluntary efforts, will not yield the desired results.
"As time goes on, we're not going to see the escalation of permanent mods as forecasted," said Bill Longbrake, a former mortgage industry executive who helped design the administration's modification plan. "They are going to fall considerably short. That would suggest to me that month-by-month criticisms will grow as the data comes out and it continues to fall short of expectations."
So how do policymakers fed up with voluntary efforts shift to something mandatory? The most expedient course: revive a bill sponsored by Sen. Dick Durbin, D-Ill., that would allow judges to rework mortgages in bankruptcy.
"The only mandatory bullet in the chamber that the administration could fire would be mortgage bankruptcy reform," said Jaret Seiberg, an analyst with Concept Capital's Washington Research Group. "That is a constitutional way that the government could force a creditor to restructure a debt."
Though the banking industry defeated similar legislation only three months ago, Seiberg said one of their principal arguments — allow time for the Obama plan to work — is now gone.
"That was a key argument and it's one that would be off the table now," he said.
Whether Durbin's bill succeeds may depend on whether the administration pushes for it. During the last debate, the administration said it supported bankruptcy reform, but did little to counter industry arguments against it. If the Treasury concludes its modification plan is likely to fail, it could decide to take a more active role in pressing for the legislation.
"Congress soon should recognize that voluntary measures — even with incentives — by entities that profit from homeowner defaults and unsustainable loan principles cannot lead us out of this crisis," said Alys Cohen, who testified for the National Consumer Law Center during a hearing last week.
Durbin agreed. "We have to revisit this issue," he said. "That's what this has been about up to this point: Waiting for the banks to step up and volunteer to solve the problem. It's time to admit that isn't working."
Beyond mortgage bankruptcy, Congress could simply bar lenders from foreclosing if they have not attempted a modification first.
"They may have to do [mandatory modifications] unless the current program picks up speed into the next few months," said Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc. "Pressure will mount in the next couple of months, and they may have to expand it to another carrot or a stick."
But so far the Treasury is not contemplating massive revisions or added restrictions to the Home Affordable Modification Program, which got its start in April. In fact, the administration won concessions Tuesday from the industry after a series of meetings with servicers.
Beginning Aug. 4 the Treasury will publish company-by-company data on modification efforts in an effort to increase public pressure on banks that lag peers. Servicers also agreed to set metrics to measure the performance of the program. Freddie Mac, which will help administer the program, will conduct audits of modifications that were denied by servicers.
Yet many critics among industry and consumer groups viewed Tuesday's meetings as little more than public relations.
Treasury Secretary Tim Geithner and Housing and Urban Development Secretary Shaun Donovan did not attend any of them. (They did release statements praising the meetings.)
Robert Gnaizda, a California-based consultant to homeowner counseling groups, called Tuesday's meeting a "farce," and said that despite the administration's program, officials have been too timid on the issue to make modifications work.
"I always prefer carrots to sticks," Gnaizda said. "However, the administration's efforts, going back to the Bush administration, have shown that in this crisis carrots aren't working. Therefore, we must start to consider mandatory provisions."
Bruce Marks, CEO of Neighborhood Assistance Corp. of America, agreed and called the meetings a "public show."
"What Obama needs to do is stop pleading and begging these servicers," Marks said. "He needs to require them to do it. … The idea you have to beg and plead them is the same thing Bush did and Paulson did. It's the same old, same old."
Under the administration's plan, borrowers who receive a modification must show they can stay current for three months. The administration has made 200,000 trial modifications, and offered 55,000 refinancing.
Through the program, lenders have also extended roughly 370,000 modification offers. Those figures are well below the pace needed to reach the administration's goal of helping 7 million to 9 million borrowers. Moreover, experts said the final figures could go down, not up.
Longbrake, a director of the $1.2 billion-asset First Financial Northwest, a one-office savings bank in Renton, Wash., just south of Seattle, said he expects a significant number of trial modifications will not stay current through the trial period. Longbrake said the program has not worked because it is too complicated, it has problems with respect to second liens and it does not address the rising unemployment rate.
"As time passes and you see the obstacles, one of the things I've learned over the last few months is the complexity of the program," he said.
He said the program requires so much documentation from servicers that it has made the process cumbersome and slowed down the process.
Pete Mills, a consultant to Potomac Partners, agreed.
"I think there is legitimacy to the servicers' arguments that this program is very complicated," Mills said. "There are heavy-duty compliance obligations. It's not a streamlined modification program."
Previous efforts were not successful either. The Bush administration's first attempt was Hope Now, where a collection of servicers and lenders outlined a standardized approach to modifications.
Then Congress created the Hope for Homeowners plan, a program designed to help underwater borrowers whose mortgage was worth more than their home. But both plans failed to gain much traction for similar reasons: critics said they were too complicated and servicers and lenders were reluctant to use them.
