This month the Treasury Department will begin paying mortgage servicers $1,500 for approving the sale of homes for less than the balance of the mortgage, also known as a short sale. Also, if the mortgage servicer modifies a mortgage under the HAMP program, they will receive $1,000, plus additional money over the course of three years if they homeowner doesn't fall into foreclosure during that time period. However, many analysts and homeowner advocates say that the government payouts offer little incentives for mortgage servicers who make more money off of foreclosure than modification.
Those "carrots" won't be enough to save the majority of the 4.6 million U.S. homes that have mortgages more than 90 days overdue, said Diane Swonk, chief economist of Chicago-based Mesirow Financial, which oversees $37.4 billion. The payouts at the heart of the Obama administration's programs don't come close to what servicers earn by foreclosing, she said.
"The incentives being offered by the government are small compared to the counter-incentive of foreclosure," Swonk said. "The service industry has its own set of incentives, and you can't tell people to do what's not in their financial best interest, especially in an economy that is still struggling."
It is amazing that it has not become abundantly clear to our government that mortgage servicers really have no intention of fully committing to the HAMP program or any variation of that foreclosure prevention program. They are simply making too much money with foreclosure, well at least compared to what they would make from the modification program. And how beneficial has the mortgage modification program been for homeowners facing foreclosure? Well consider this, at the end of 2009, 48 percent of mortgages modified in the second quarter of 2009 had missed at least one payment, and 24 percent of loans modified in that period were 90 days or more overdue. Many of those homeowners will eventually succumb to foreclosure. What we need now are long-term solutions that will not only tackle the foreclosure crisis facing homeowners but also their other debt troubles that conspire to sink them deeper into a financial hole.