The Treasury Department under Timothy Geithner’s leadership has developed several programs meant to help ease the residential foreclosure crisis in the U.S. over the past two years. Several modifications to those programs have also been released in attempts to make those programs work better. So far these programs have had very little effect on either homeowners or banks.
The latest report from the Congressional Oversight Panel, tasked with monitoring the foreclosure-help programs, reports that fewer than 200,000 people have received “permanent” help in the forms of lowered monthly payments or reduced principal amounts on their loans. They estimate that ten borrowers are going into foreclosure for every homeowner that is helped. And permanent is not really the proper word as the modifications only apply for five years. According to the panel the actual effect so far has been only to prolong the pain of the borrowers facing foreclosure.
There are many reasons for the lack of effectiveness of Treasury’s programs so far. The main reason is timing, with programs coming too late and offering too little. All of the programs so far have also been voluntary for the banks with little or no incentive for them to participate. The slow trickle of new programs and updates to those programs has seemingly encouraged both banks and borrowers to take a wait-and-see approach in the hope that something better will be offered by Treasury in the future. The banks have therefore been accepting applications for loan modifications from borrowers, stretching out the process with repeated requests for more information and then ultimately denying those applications.
While this process has been playing out foreclosures have continued to pile up and home prices have continued to fall in most areas, particularly in the Tampa Bay and the metropolitan Miami areas of Florida, some of the hardest hit in the country. One result is that even borrowers that have received “permanent” loan modifications and reduced monthly payments will probably still be upside-down on their mortgages when the five-years modification period expires and their payments go back up again. For those denied modification help the process and the pain involved with it have just been extended by a period of up to eight months with the same final result: foreclosure.
Treasury needs to devise a plan to make participation by the banks mandatory. The banks must stop receiving help for foreclosure losses to force them to see loan modifications as a better alternative to foreclosure. Finally, the process needs to be made less confusing in order to encourage more borrowers to participate.