Why Are Home Mortgage Modifications Moving So Slow? A Glance at the Red Tape and Reasoning

If servicers appear to be failing in their implementation of the Obama administration's loan-modification program, it may be for good reason: Reunderwriting hundreds of thousands of borrowers who got low- or no-documentation mortgages just takes time.

Some say that's not a bad thing, as the extra verification steps this go-round will only help the mods to stick, reducing fraud along the way. "This is all about putting evidence together to support or deny a loan. We have to stop making bad loans and we can't make 'no-doc, low-doc' mods," said Jay Meadows, the chief executive of Rapid Reporting Verification Co. LP, of Fort Worth.

Servicers methodically gathering documents, collecting signatures and, in particular, verifying income, may be slow to produce results, but not taking these precautions could result in modified loans that redefault, observers say.

"The verification process is at the root of getting an acceptable pull-through rate, which is the be-all and end-all of why we're doing this," said Bill Garland, a senior vice president at Fiserv Home Retention Solutions, a unit of Fiserv Inc. in Brookfield, Wis., hired by Fannie Mae to assist servicers in collecting information from borrowers. "It's a more permanent fix."

The tortoise-over-the-hare approach also allows servicers to address an increased threat of fraud that comes with the Home Affordable Modification Program. "The best time to steal from a store is when the shopkeeper is busy and you can stick stuff in your pockets," said Meadows. Putting customers through a series of verification steps, while time-consuming, is preventive medicine, experts say.

"We've elected to basically require that and get that done up-front, so you do not end up with the problem whereby you give someone a Hamp modification based on a verbal and then they don't provide information that's equivalent," said William Erbey, the chairman and CEO of Ocwen Financial Corp., a servicer of subprime mortgages, said on a conference call last week. "That becomes a difficult situation further on down the line."

Ocwen trailed most other servicers in the report card on the program that the Treasury Department released last week. Only 6% of the West Palm Beach, Fla., company's eligible loans had begun a trial modification at the end of July, compared to 9% for all participating companies and 25% for Morgan Stanley's Saxon Mortgage, the leader of the pack. But Ocwen said it was taking the time to verify income before modifying loans.

source: American Banker