-Staff Writer-

WASHINGTON (FinalCall.com) – While the Treasury Department tightens the screws on mortgage lenders with monetary penalties and sanctions for not using government money to help homeowners, a new report says there are few incentives for lenders to offer modifications.

The National Center for Consumer Law’s report, “Why Servicers Foreclose, When They Should Modify, and Other Puzzles of Servicer Behavior,” revealed servicers, unlike investors or homeowners, generally don’t risk losing money on foreclosures. In fact, mortgage servicers usually make money on foreclosures.

Report author Diane E. Thompson, an attorney with the center, said, “The country is in the midst of a foreclosure crisis of unprecedented proportions. Millions of families have lost their homes and millions more are expected to lose their homes in the next few years. With home values plummeting and layoffs common, homeowners are crumbling under the weight of mortgages that were at best only marginally affordable when made.”


“One common sense solution to the foreclosure crisis is to modify the loan terms in more instances. Foreclosures are a costly ordeal for the homeowner, the lender, and the community. Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes.”

The Mortgage Bankers Association reported Nov. 19 that a record number of loans–1 in 7–is delinquent, up from 1 in 10 a year ago. The numbers also show that 1 in 22 families in the U.S. is in the process of losing their home, up from 1 in 34 a year ago.

The Treasury Dept. released its plans to help homeowners Nov. 30. Part of the new program is to help borrowers who are currently in the trial phase of modified mortgages under the Obama administration’s Home Affordable Modification Program (HAMP).

The modification program, which according to the Treasury has helped over 650,000 borrowers, is part of the administration’s broader commitment to stabilize housing markets and to provide relief to struggling homeowners and a primary focus of financial stability efforts moving forward.

But that’s not enough, say many who work on the behalf of frustrated homeowners.

“The Obama administration’s latest adjustments to its nine-month-old foreclosure prevention program do little but highlight the continued failure of lenders’ voluntary efforts to stop the foreclosure crisis,” said Michael Calhoun, president of the Center for Responsible Lending.

“The number of Americans in foreclosure continues to rise dramatically, with up to three million new foreclosure starts this year alone, a trend that undermines economic recovery.”

Roughly 375,000 of the borrowers who have begun trial modifications since the start of the program are scheduled to convert to permanent modifications by the end of the year.

“We are encouraged by the pace at which trial modifications are now being made to provide immediate savings to struggling homeowners,” said the new chief of Treasury’s Homeownership Preservation Office Phyllis Caldwell. “We now must refocus our efforts on the conversion phase to ensure that borrowers and servicers know what their responsibilities are in converting trial modifications to permanent ones.”

“Without mandatory requirements and fully disclosed results, foreclosure prevention efforts–no matter how well-intentioned–will not succeed. And the cost of failure will be borne by not just struggling homeowners, but by their neighbors, communities, and the larger economy,” warned Mr. Calhoun, of the Center for Responsible Lending.

The consequences of not having mandatory requirements such as loan modifications can be grim for homeowners. As the National Center for Consumer Law’s report, released in October, explained, “Loan modifications inevitably cost the servicer something. A servicer deciding between a foreclosure and a loan modification faces the prospect of near certain loss if the loan is modified, and no penalty, but potential profit, if the home is foreclosed.”

The two lending advocacy groups recommend that Congress:

-Require loan companies to stop foreclosure proceedings while loan modifications are under consideration.

-Require loan companies to work with homeowners in distress.

-Mandate loan modifications before a foreclosure.

-Provide for principal reductions on existing loans in the administration’s Home Affordable Modification Program and through bankruptcy reform.

-Increase automated and standardized loan modifications for borrowers in default and provide a safety net for borrowers for whom a standardized modification is not affordable or who later default, through no fault of their own, on a loan modification.

-Create a low-cost, short-term loan program for unemployed homeowners who have no other option for keeping current on their mortgage.

-And allow stressed homeowners the option of lowering theirprincipal mortgage balance, including through bankruptcy courts.