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Sunday, November 29, 2009

The White House Threatens the Banks

The president's loan modification program is an utter failure. That's without a doubt. The president pronounced that up to 7 million people would have their loans modified and saved from foreclosure. So far, only 500,000 have been done and almost 90% are in their probationary period. Meanwhile, the loan modification process has turned into a bureaucratic nightmare that has made the normal loan process appear streamlined. If you've ever applied and been approved for a mortgage you can appreciate that comparison.

The reasons are pretty straightforward. First, the approval parameters for a loan modification are much more complicated than they are for a regular loan. (again if you've ever applied for a regular loan, you can appreciate that comparison) Loan usually take at least two months to be approved and it's not that uncommon to wait six months. (this I know through experience) To approve a loan modification, the bank needs to figure out an entire budget for a borrower including gas, food, electricity, etc. It's not entirely clear what is and is not allowed for each of twenty different boxes.

Second, banks don't necessarily want to approve a loan modification. There's an inherent moral hazard in approving them. A borrower can get a rate of as little as 2%. Keep in mind that you only qualify for a loan modification if you can't afford to make the payment on your current mortgage. While it's not mandatory, banks are much more apt to approve a loan modification if you're already behind on your current mortgage. If too many people get a loan modification everyone will want one and everyone will scheme, including missing mortgage payments, to get qualified for one.

Finally, prior to 2008, there were a handful of loan modifications done. Even in 2008, the number was in the tens of thousand for all banks. Now, the president wanted to expand that to 7 million. He literally created a new industry, the treasury also created all the rules for said industry, and so no one should be surprised that said industry is going through growing pains.

This is all entirely due to a complete lack of planning by the White House. The administration wants the banks to them en masse. Yet, the banks are very weary of doing too many. They are confused by the rules. Their bureaucracies are still being set up to handle the influx of applications. Most of all, banks do in fact realize the potential disaster looming if they create another moral hazard in mortgages to their own bottom line.

The administration's strategy throughout vis a vis the banks has been to guilt them into approving more of them. The administration constantly harps on the fact that many of these banks received a bailout. It's true. They did. Yet, they received a bailout following reckless behavior. Wouldn't we want to now encourage banks not to continue reckless behavior. I'd say that approving, en masse, loans as low as 2% to borrowers currently behind on their mortgages is reckless.

The failure of the loan modification program adds to a growing list of administration programs that are turning into an embarrassment. Now, it appears that the administration will amp up the pressure on the banks.

The banks are not doing a good enough job," the Times quoted Barr saying in a Friday interview. "Some of the firms ought to be embarrassed, and they will be."

Treasury spokeswoman Meg Reilly said Saturday the department was "taking additional steps to enhance (mortgage) servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications."

That could include new resources for borrowers, Reilly said without offering details. The department will announce new measures Monday, Reilly added.

Put yourself into the position of the banks. Loan modifications were always supposed to be a case by case basis. They were always meant to be done very infrequently for truly extraordinary circumstances. Then the administration makes them a key cog in their overall economic recovery plan. The administration even gives the banks incentive to do them. (banks get a $1000 fee for each closed plus yearly and monthly fees) Yet, the program is totally confusing and it goes against every business instinct. By refusing to approve them briskly, you then earn the ire of the administration. So, you're effectively stuck between the proverbial rock and hard place.

Now, imagine if the administration does in fact follow through, effectively, and embarrasses all those banks that aren't closing enough modifications. Now, banks will suffer through a miserable period of public relations being put in the cross hairs of the administration's media machine. Just ask the insurance companies how that feels. The only alternative is to begin to make hasty decisions in a confusing process that you really want no part of to begin with. Talk about a recipe for disaster.

1 comment:

Jason Gillman said...

its already started..,2933,577105,00.html

what the hell happened to my country?