Loan Modification Hall of Shame, How Bad Is Your Bank

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If Mortgage providers cannot be coaxed into action maybe they can be shamed into action. That seems the line the Obama administration is taking with banks that are dragging their feet and digging their heels while the administration is flexing every muscle to push forward its Mortgage Modification program to help millions of Americans avoid foreclosure.

Naming and shaming has been a popular business tool to “encourage” people and companies to do what they don’t want but know they must. Banks realize they must help homeowners to save their homes just as banks were rescued with the recent bailout on banks. They understand that in the long run a healthy housing industry will mean larger profits for banks. However getting lenders to reduce loans and provide breaks that limit their profit or cost money to provide is never going to be an easy task.

So how did banks do in the shaming and naming game?
The leader of the pack in loan modification turnover (now that is a performance figure that wasn’t used before) is Saxon Mortgage Services a subsidiary of Morgan Stanley with a 25 percent of its loans in trial modifications. It is not only the smaller banks that have shown willingness to work with the administration. Larger banks like JPMorgan Chase with 20 percent and Citigroup with 15 percent are showing how it’s done even when you have to maneuver a behemoth of a company to reorganize the services you provide.

Unfortunately it is not all good news for banks. Wells Fargo parent of Wachovia showed a puny 6 percent of delinquent mortgages in trial modifications while Bank of America bottomed the list with 4 percent.

The Obama administration has responded to this with a clear target for banks to meet a cumulative magic number of 500,000 trial modifications by November the first. These trial modifications are part of the Mortgage Plan set by the Obama administration. The idea is that before a borrower is allowed to qualify for a final modification he or she must undergo a three month trial where he must pay every payment on time. If he or she does just that there is an incentive in cash that is deducted from the borrower’s principal. The incentives don’t stop there, for every year payments are made the government will pay cash to reduce the principal of the loan up to $3,000 which means larger sums when interest is calculated.

Why are banks so slow in responding to the mortgage plan?
There are various reasons, mainly two, banks are not geared to providing loan modifications and there are not always in the best interest of the bank. Let’s have a look at these two factors.

1) Loan Modifications as a new bank service.
Up to recently banks tended to simply lend, collect and process mortgage payments. They of course have their fingers in all kinds of investments but in the retail mortgage sector lending and collecting is pretty much what a bank did. Other debt relief companies would specialize in providing debt consolidation loans and similar services. Now the government wants banks to become loan modification machines and FAST.
This is not as easy as it seems. It includes training staff, setting protocols and guidelines, a new type of management that can make fast and effective decisions on a relatively new product. In other words, changes, changes and changes. Something big banks are not that used to making.

2) It just isn’t always that profitable.
Banks are profit organizations not charities. The decisions they make are based on profit analysis not a generous spirit and you could argue that is the only way our current economy model is going to work. Loan Modifications are simply not always profitable for companies. In some cases they are a win win operation as they help borrowers make smaller monthly payments and increase the overall interest the bank makes on their investment. However on many occasions loan modifications simply cost the bank more money for no measurable benefit.

Encouraging banks to do that is not an easy task, which is probably why they are trying to shame them into doing it.