How the Banks Are Killing the Government Loan Modification Programs

The government's programs to help stop the foreclosure crisis were probably started with the best of intention. Good intentions, however, can not cover for economic ignorance and an unwillingness to face the facts of the housing market. Prices are declining and more people are facing foreclosure due to the poor lending decisions created by cheap easy money and the erosion of lending standards.

As well, many of the government's programs suffer from the same problems. Unfortunately, with each failure, the programs are not canceled. Instead, they are further funded, grow bigger, change names, or a similar plan with only superficial changes is layered on top of the old one. The old plan loses steam, while the next one, almost identical to all previous ones, is announced with far greater optimism than is deserved.

But the problems are never solved. Voluntary participation, unaccountability, lack of responsibility to do anything by the lenders or servicing companies, lack of penalties for not complying with the regulations, and all the power given to the banks are just a few of these problems. They have been the same complaints from consumer advocates and homeowners from the very first plan put in place by the government.

Servicing companies and lenders, for instance, have almost all of the negotiating power that borrowers do not have. When lenders are given the choice of participating in the voluntary government programs, compliance is often lacking and few resources are dedicated to meaningful loss mitigation efforts. The lender decides how much to participate in the plan and has all of the financial power.

The government programs, mandatory or voluntary, also impose few rules for compliance. While servicers have some responsibilities to negotiate with homeowners, the level of participation is often very lacking. Borrowers who have ever tried to communicate with a bank know how frustrating it is when the bank loses faxes numerous times and never returns phone calls, all to be turned down at the last second.

Even if the bank does absolutely nothing to help the borrowers, whether required to or not, how can the lender be held accountable? Unfortunately, it is only in the courts that the consumers can state their claims, and many borrowers try to negotiate for a loan modification or other solution in order to avoid going to court. Especially in nonjudicial states, going to court to enforce a potential negotiation plan may not make sense.

Court-mandated negotiations have also failed to materialize as a widespread solution to foreclosure, as the banks have been able to block legislation that would allow bankruptcy judges to modify the terms of first mortgages or reduce balances. Some states and certain courts, however, have begun to scrutinize foreclosure cases more carefully, which may work out in homeowners' favor more often.

Unfortunately, the problems associated with the government's programs to avoid foreclosure have far outweighed any benefits to the small number of borrowers who have received assistance. Three hundred billion dollars to help one borrower, as was the case with the Hope for Homeowners program, probably helped create more foreclosures than the one it fixed. The only real question is if more regulation and legislation is what is needed to fix the programs.