Geithner to Scold Mortgage Servicers Later This Month

Lordie, the theater is beginning to look like a Punch and Judy show, where everything is staged and no one gets hurt.

Joe Nocera has a not-too bad piece on the latest comedy of errors, except he takes the Adminstration’s PR way too seriously:

Remember that infamous meeting last October at the Treasury Department, the one where then-Secretary Henry Paulson locked the chief executives of the nation’s nine largest financial institutions in a room, and wouldn’t let them out until they agreed to accept billions of dollars in government bailout money — whether they wanted it or not?

O.K., that’s a bit of an exaggeration. But I was reminded of that meeting on Thursday night when I was shown a letter that the administration had just sent out calling for yet another big meeting at Treasury with yet another sector of the financial industry. Signed by Treasury Secretary Timothy Geithner and Shaun Donovan, the housing and urban development secretary, the letter demanded that representatives from the top 25 mortgage servicers assemble in Washington on July 28. It is likely to be every bit as painful for them as that Paulson meeting last October was for the bank C.E.O.’s.

Yves here. Geithner beat up on the banks? Please. This notion comes from an alternative universe. One thing that Paulson was good at was muscling people. This has never been in Geithner’s skill set. If Larry Summers were a participant, I might take the Nocera scenario seriously, but this is pure fantasy.

Nocera then tells us why servicers are not set up to do mods and gets to the punch line:

In truth, servicers and banks don’t yet have powerful enough incentives to do large-scale mortgage modifications. The servicers and modification experts I spoke to this week all agreed that the $1,000-per-modification being dangled by the government was pretty meaningless, given the amount of time, money and effort they require.

So now that the carrot hasn’t worked especially well, the government is taking out the stick. That letter the administration sent out on Thursday did not mince words. It demanded that the servicers begin “adding more staff than previous planned, expanding call centers beyond their current size, providing an escalation path for borrowers dissatisfied with the service they have received, bolstering training of representatives, developing extra online tools, and sending out additional mailings to borrowers who may be eligible for the program.”

And the laggards? Starting next month, the government plans to begin publishing data showing which servicers are doing well and which are doing poorly,

Do you, dear readers, think that is going to make an iota of difference? Manifest unhappiness about bankster pay hasn’t had much impact either, now has it?

It is a bit surprising that Nocera regards the failure of this program as news. We were skeptical when it was launched:

But I have my doubts that it will work. First, despite the bribes to servicers, I don’t see strong reasons for them to play ball. These mods will be costly, I am not certain the comp is adequate, and mortgage securities holders may sue.

Second, the redefault rate on mortgage mods that do not have significant principal reduction in the first six months now is high. The New York Times reports that payment reductions are expected to be “hundreds of dollars” a month. Is that really going to make a difference with most borrowers, particularly since the interest portion is tax deductible and these mortgages are recent (ie, the interest component is a high proportion of the total payment).

Third, the program qualifies people based on mortgage payments relative to total income. Some consumers are so up to their eyeballs in debt that a mortgage mod is merely rearranging the deck chairs on the Titanic. So in this version of the program, borrowers with high levels of overall debt (55%= to income) get debt counseling! Let me tell you, someone in that fix is probably beyond hope. In the old days of easier credit, someone paying 29% on credit cards could get a somewhat less punitive rate via debt consolidation. I doubt there is much of that sort of credit on offer right now.

Fourth, second mortgage holders don’t have reason to play ball

So I wonder if this is again grandstanding, to make it abundantly clear that the Administration is washing its hands of the problem and fobbing full responsibility for the problem back on the banks.

The best solution was to have had judges be able to modify loans in bankruptcy. But Team Obama does not throw its weight behind many of the things it in theory favors (it backs down and calls it “compromise:” at the drop of a hat) and did not have BK mods as high on its list of priorities.

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  1. MutantCapitalism

    Re: "Starting next month, the government plans to begin publishing data showing which servicers are doing well and which are doing poorly,"
    Maybe the government could expand its servicer evaluation to include which ones are upholding FTC Settlements and OTS Supervisory Agreements.
    FTC v.Fairbanks/SPS
    FTC v. EMC/Bear Stearns
    OTS and Ocwen Federal Bank re: servicing practices
    Maybe the government will look into real cause of extensive consumer litigation against servicers. Maybe the government will realize many recipients of TARP incentive payments for mortgage modifications presently totaling $18,659,100,000 continue to engage in predatory servicing despite ongoing judgments against them. Joe Nocera doesn't even mention the 18+ Billion TARP funds servicers have already received. Truth is that mortgage servicing fraud is far more lucrative than mortgage mods. Geithner thinks he is going to take these veteran fraudsters to the woodshed? He's just playing us.

  2. Chris

    So the market has decided that mods are not worth doing. Aren't we supposed to let the market decide?

  3. FairEconomist

    Geithner will, undoubtedly, follow this up in a couple months with an announcement that he plans to eventually produce new regulatory rules on mortgage servicing sometime in the indefinite future. If there's enough pressure on him from reformists we'll see some obligations to report to some captive regulatory agency without enforcement powers – because, as we all know, the market is super-efficient at credit risk management and we don't want the government to interfere.

  4. Hugh

    The PPIP, the revised TALF, the first mortgage program, the stress tests, his financial regulation proposals, the TARP repayments, the just announced revised mortgage program, and now this meeting: is there really anyone more useless than Geithner? I mean aside from Summers. Neither has done a single intelligent, effective thing yet.

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