Fixing the Mortgage Mess

Only 9%, of the potential 2.7 million homeowners who are 2 months past due on their mortgage, are enrolled in a loan modification program. Of the 235,000 enrolled homeowners, 55% re-default within six months! While this problem continues to drag on the national economy the opportunity to assess and solve for the mortgage crisis hinges on a customer facing strategy focusing on each homeowner’s personal economy. The fact that most mortgage servicers are failing to provide the resources necessary to engage in a customer facing strategy has only made a bad problem worse.

At the foundation of the crisis is the complete lack of customer facing strategies designed to enter a meaningful dialogue with each troubled borrower. Given mortgage servicers are loath to enter a conversation with the customer about real solvency for their personal mortgage crisis, very few people are getting the help they need to stay in their homes. The leading mortgage servicers are doing the country a disservice while taking taxpayer money by failing to address the real issues: extending mortgage terms, consolidating debt and lowering principal balances. At the very least, mortgage servicers should engage the borrower in a personal financial conversation designed to improver their ability to make payments, on time and over time. Unfortunately, most lenders are waiting until accounts are well past due to engage the borrower, many of whom are too far behind to make the necessary changes required to improver their personal economy.

Servicers are currently not willing to engage in serious loan modifications partly because the incentive structure set by the government ($1,000 per modification) does not make sense given the servicers largely bloated cost structure. Furthermore, contracts between the servicers and the owners of the debt do not provide any carrots to improve the overall health of the loan portfolio. In fact, many contracts penalize servicers if the terms of the loans are modified in any meaningful way. This failure by the large services has also been compounded by the tight access to credit preventing debt consolidation plans that would reduce monthly debt payments. In the past, a borrower paying a high rate on interest on personal loans and credit cards could often reduce their debt to income ratio by getting a less punitive rate somewhere else. Today, there is simply no somewhere else.

The vacuum created during the credit crisis has made a significant population of borrowers subject to deceptive marketing practices by companies promising to lower debt and keep people in their homes. This has spawned many discussions in Washington on creating even more regulatory scrutiny and hurdles. For example, The FTC has announced public forums on proposed amendments to the Telemarketing Sales Rule that would specifically address “debt relief.” These rules have been proposed to “seek to combat deceptive and abusive telemarketing of debt relief services that purportedly can reduce consumer credit card debt and other unsecured debt.” Unfortunately, whatever machinations come out of the FTC generally will carry unattended consequences that may prevent ethical firms from reaching out to troubled homeowners. Policies designed to protect the many may further compound the problem from limiting access.