Six out of 10 seriously delinquent borrowers are never involved in loss mitigation efforts, and the total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow, concludes a new report from the State Foreclosure Prevention Working Group.
The group, which includes 12 state attorneys general, three state bank regulators and the Conference of State Bank Supervisors, was founded in 2007 and has issued three prior reports. According to its most recent report, the federal Home Affordable Modification Program (HAMP) has slowed down the foreclosure crisis, but current industry efforts are still insufficient.
The new report notes that borrowers who are involved in loss mitigation and foreclosure prevention face a process that is seriously backlogged. The average time to complete a loan modification for some servicers is over six months.
"We certainly have not turned the corner on the foreclosure problem, despite major and commendable federal and state efforts," says Iowa Attorney General Tom Miller, a leader of the State Foreclosure Prevention Working Group. "We've said it before, and we are saying it now: Servicers must do even more to slow the tide of unnecessary foreclosures."
The working group found that, while most modifications now result in payment reductions, principal reductions remain rare. Given the correlation between negative equity and likelihood of default, the failure to write down principal in connection with loan modifications is a glaring flaw in current efforts, the regulators conclude.
‘The failure to reduce principal jeopardizes the sustainability of loan modifications,’ Mark Pearce, North Carolina's deputy banking commissioner, said Wednesday.
The regulators recommend improving loss mitigation programs through higher prioritization of principal reductions in areas of significant home price declines. Modification programs that rely on monthly payment reductions alone will have limited success in creating sustainable homeownership in states where a large percentage of mortgage loans are significantly underwater, the regulators say.
Although HAMP has led to offers of loan modification assistance to over 1.1 million homeowners, the regulators' report says early indications are that servicers have been unable to implement the program effectively, and many homeowners with trial modifications are not yet qualified to transition to a permanent loan modification.
"To be sure, we would be in a much worse place without these efforts, but these efforts must be improved," the report says.
HAMP must increase transparency and reduce paperwork in order to reach its full potential, the report suggests. While the regulators applauded the Treasury Department for steps it's taken to reduce paperwork burdens, they say more streamlining is necessary to reduce burdens on both servicers and homeowners.
The report also comments on the dual-track nature of servicers' loss mitigation and foreclosure processes, advising servicers to suspend foreclosure proceedings on any loan involved in the loss mitigation process. In some cases, homeowners have lost their homes while being told they are being considered for a loan modification. A statement from the group calls such practices "unacceptable."Â
The regulators additionally recommend that servicers pay particular attention to reforming payment-option adjustable-rate mortgages and that states consider expanding homeowner counseling programs or implementing temporary foreclosure mediation programs.