Have the banks not staffed their modification programs with enough people?  Are they simply using the Obama Administration’s plan as some kind of collection tactic to squeeze homeowners afraid of foreclosure?

While no one knows for sure what is causing the long wait times, experts in the area have come up with logical explanations and the American Bar Association released a free web seminar earlier this month discussing these issues and how the real estate crisis developed.

The 60 minute pod cast features Jamie Lathrop, Marc S. Stern and O. Max Gardner, III who all agree that without a motivating factor banks will continue to drag their feet.  O. Max Gardner, III calls modification in a Chapter 13 bankruptcy the hammer that is missing from the Obama Plan.  Having failed to pass the Senate earlier this year, Max predicts that a bankruptcy modification bill will be before Congress again by September.

The threat of foreclosing and having to write down their balance sheet should motivate banks, but as pointed out in the seminar, servicers have an incentive to allow a troubled property to sit on their balance sheet as it collects penalties and fees.  After all, when the property is foreclosed on, the servicer or a related third party will be paid for liquidating the troubled asset while the investor and the homeowner take the hit.

O. Max Gardner, III compared the securitization of mortgage loans to an expanded mortgage flipping scheme, pointing out that those borrowers with ARM loans are forced, by a scheduled increase in their interest rate, to refinance and again pay fees associated with doing so.

The experts also discussed limitations placed on servicers by the pooling and service agreements they have with investors.  Some of these agreements do not allow for any modifications and others only allow for a handful.

While it may not be entirely clear what is taking so long, it is clear that things are unlikely to change until a new kind of motivation presents itself.

To qualify your home must be your primary residence, the amount you owe on your first mortgage must be equal to or less than $729,750 and you must have obtained the mortgage before January 1, 2009.

Do not be surprised if you qualify.  The Treasury Department’s plan released March 4th states that as many as 4 Million homeowners will receive assistance.

Qualified homeowners need to gather information to provide to their lenders including information about their gross income, their assets, any second mortgage on the house, as well as balances and minimum monthly payments on all credit cards, student loans and car loans.

The stated goal of the Home Affordable Modification program is to reduce the amount homeowners owe per month to a sustainable level in order to stabilize communities.  The target affordability level of a monthly mortgage payment is set at 31% of a homeowner’s gross income.

But the financial institutions and investors need only get the payments down to no greater than 38% of income.  Then the program matches further reductions in monthly payments dollar for dollar to reduce the debt-to-income ratio of a borrower down to 31%.

You might be asking yourself, “How is this possible? How are they doing this?”  Well, in order to reduce the debt to income ratio down to 31%, interest payments are first reduced down to as low as 2%.  If the ratio is still above 31% lenders then extend the term of the loan up to 40 years.   Finally, if the payment has not yet reached the 31%, lenders forbear principal at no interest.

In order to entice lenders, borrowers, servicers and investors, the plan offers certain incentives for loan modifications.  Servicers receive $1,000  up front for each eligible modification and also receive another $1,000 each year for up to three years when the borrower makes their modified payments.  Borrowers are enticed to make their monthly payments under the plan with $1,000 for each year that they stay current on their payments.

Loan modifications under the Treasury plan do not require the participation of junior liens and the program includes additional incentives to extinguish them. Servicers are reimbursed under the plan for the lien release according to a specified schedule and also receive an additional $250 for obtaining the release of a valid junior lien.

Notably, none of the incentive payments are made unless the modification lasts for at least three months.  And borrowers who have a debt to income ratio over 55% are required to undergo HUD counseling as a condition of the modification.

When modification is not available the Treasury plan offers servicers incentives to take alternatives to foreclosure. A future post will discuss the possibility of deeds in lieu of foreclosure, short sales and the incentives provided to the parties who agree to their terms instead of going through foreclosure.

Also present in the Home Affordable Modifications section of the plan is a concession by major mortgage insurance firms.  Those firms are said to have agreed to develop a plan by which they will accept partial claims on modified loans where it is appropriate to do so in order to avoid foreclosure.

Running through the entire Treasury plan is the sense that everyone involved is giving a little in order to minimize the impact of the foreclosure crisis by trying their best to avoid foreclosures that are otherwise uneconomic to proceed with.  Qualifying for a modification under the plan could mean that the home you have been burdened with will become affordable again.