Mortgage modifications done right
David Bornstein has a great post about ESOP, an Ohio non-profit which acts as a middleman between homeowners and lenders, and which does a much better job of getting modifications done than banks and borrowers are if left to their own devices. He writes:
One thing that distinguished ESOP from the government’s program, as well as other mortgage counselors, is how it holds lenders accountable. It has gotten several large companies, including Bank of America, CitiMortgage, Ocwen Financial Corporation, and Litton Loan Servicing, to sign “fair lending agreements” which spell out the terms of their working relationship. In its agreements, ESOP requires that lenders provide a single point of contact, someone with decision making authority. Without this access, ESOP says, homeowners get bounced around the bureaucracy, making little progress, and files simply vanish, frequent complaints from borrowers who seek to take advantage of the government assistance. ESOP also insists on a defined escalation process for cases it believes are mishandled. Some agreements give it the right to appeal all the way to a lender’s chief executive.
ESOP also succeeds by adding a human element. They bring executives from banks and loan servicers on community tours, where they get to meet their homeowners and see the effects of their policies. These neighborhood tours almost always strengthen ESOP’s partnerships with lenders. Countrywide (now owned by Bank of America) signed an agreement after senior executives took a tour of Slavic Village, an area on the east side of Cleveland where a third of homes, many of them foreclosed by the lender, remain vacant, boarded up, stripped and ransacked, demolished, or occupied by squatters and drug dealers…
ESOP genuinely helps its lenders do something they are not structured to do well: communicate effectively with a large number of distressed borrowers. “[ESOP has] been instrumental in completing that last link of the communication chain without which we’re dead in the water,” explained Paul A. Koches, the general counsel for Ocwen, which services a half million mortgages, and was one of the early companies to form a partnership with ESOP.
The point here is that relationships between banks and their borrowers are fraught at the best of times, and have only got steadily worse in the wake of the financial crisis and the wave of delinquencies and foreclosures which has overwhelmed the servicers. ESOP breaks the destructive cycle of mistrust by essentially forcing both sides to negotiate in good faith.
It’s worth remembering the testimony of Adam Levitin:
A critical point in any global settlement must be removing mortgage servicers from the loan modification process. Servicers were historically never in the loan modification business on any scale, and four years of hoping that something would change have demonstrated that servicers never will manage to successfully modify many loans on their own. They lack the capacity, they lack the incentives, and the lack the will.
If we’re not going to remove mortgage servicers from the loan modification process entirelyand there’s been absolutely no indication that any policymakers are thinking seriously along those lines — then services like ESOP are the next best thing. Maybe Treasury should take some of its unspent HAMP budget and try to replicate and scale the ESOP model.