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Monday, April 6, 2009

An Important First Step in Managing Loan Modifications

I have been very critical of just about all aspects of President Obama's policy regarding loan modifications. I believe he uses them too much, he doesn't regulate them enough, and as such he allows for all sorts of abuse and fraud. As such, I was very pleasantly by this announcement.

Top federal and state officials on Monday announced a broad crackdown on mortgage modification scams, accusing "criminal actors" of preying on desperate borrowers caught up in the nation's housing crisis.

Government officials say scammers are seeking to take advantage of borrowers in danger of default by charging them upfront fees of $1,000 to $3,000 for help with loan modifications that rarely, if ever, pay off.

The frauds often involve companies with official-sounding names designed to make borrowers think they are using the Obama administration's efforts to help modify or refinance 7 million to 9 million mortgages.

There are several good things going on here. First, President Obama has the general support of the media. As such, he is using that media to make a statement regarding fraud in these vehicles. He is making it clear that it won't be tolerated. The best way to combat fraud, abuse and corruption is to send a message that it won't be tolerated, and that's exactly what he has done with this statement.

Second, later in the article he identifies several big offenders including Federal Loan Modifications LLC. I use them because if you have watched enough television, you have likely seen their commercials.

Now, while this is an excellent development, this must only be the first step. All of these folks must be prosecuted and convicted and face signicant punishment. Second, so far the president is only concerned with fraud perpetrated against the individual borrower. He must expand that to fraud perpetrated against the bank or in fact against the government as well. Keep in mind, the majority of loan modifications will be done on government owned Fannie/Freddie loans. There will be just as much fraud pepetrated against those entities as perpetrated against the borrower themselves. If the president only makes a point to go after fraud perpetrated against borrowers, that will be the only fraud that will stop. As such, millions of borrowers will then commit fraud and get modifications they don't deserve because the message will be sent that such fraud is acceptable.

This is, however, an excellent first step. If Justice does a diligent job in prosecuting loan modification fraud, then much of nightmare scenarios will go away.

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