What has happened to the HOPE initiative, and the federal loan modification program? According to CNBC this morning, the 5 largest banks, led by Bank of America, Wells Fargo, JP Morgan Chase, and Citigroup, are underperforming their smaller bank rivals in participating in getting loans modified to help curb foreclosures. The excuse these banks are using is the demand is too big to keep up with. Hello – have they not heard that there is a glut of people out there looking for work who could be hired to help them keep up with demand?

Foreclosures
But the truth has been exposed in research done by the Federal Reserve Bank of Boston. Recent studies show that the big banks do not want to participate in the modification process because they will lose money, while foreclosures will ultimately make them money. Why would a bank want to modify your loan to a rate of perhaps 2% (to help you out), when they can foreclose, resell your house, and charge 5+% to a new buyer, and collect all those bank fees (origination fee, underwriting, processing, etc) during the loan process as well?

The $75 billion HOPE program was set up as an incentive to banks to help out homeowners and stop the bleeding of home values. Here’s how it was supposed to work:

1. Banks receive $1000 for each loan modified
2. Banks receive an additional $1000 per year, for the first 3 years, that a modified loan stays current.
3. The borrower must be at least 60 days late on loan payments to qualify for modification under this program.


Here’s where this incentive process has backfired.
If you, Mr./Ms. Homeowner have managed to stay current, in spite of hardships (perhaps you are draining your IRA), you don’t qualify. If you are delinquent, you are a poor risk. If you are a poor risk, it is perhaps unlikely you will be able to keep your loan current, even if your loan is modified, so the banks will not collect the extra $3000 incentives. So – what loans are being modified? The people in the least amount of trouble are getting modifications approved.

Still, to date, only approximately 225,000 loans have been modified under the HOPE program. (This is only 9% of those eligible, according to a CNBC report yesterday). Considering there were almost 900,000 foreclosures in the first quarter of this year alone, I would call this program substantially less than a success – wouldn’t you?

According to Larry Summers, Director of the National Economic Council, in his interview on Meet the Press last Sunday, it is estimated that only 500,000 loan modifications will be completed by the end of this year. There are those, even within the Obama administration that are proposing that the $75 billion funding be used to make low interest lows directly to those in trouble, rather than directly to the banks.

What do you think? Please send me your comments, and I will forward them to the powers that be. Perhaps if we get enough input, we, the people, can come up with a solution that might work?

Best regards,

Shelby