Study: Banks' incompetence thwarted 800,000 loan mods

The big banks could have prevented 800,000 foreclosures if they had handled homeowners' applications competently, according to a new study.

The federal government's Home Affordable Modification Program is on track to modify about 1.2 million loans by the end of this year. But if loan servicers had hired more and better-trained staff, HAMP could have helped an additional 800,000 homeowners, the study says.

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Since the government rolled out its first foreclosure-preventi​on programs, borrowers have complained about the difficulties of dealing with loan servicers: The banks lose documents, ask for the same data over and over, fail to respond to borrowers and otherwise make receiving any sort of loan modification an arduous bureaucratic process.

The study found significant discrepancies in the way banks' loan-servicing arms handled modifications. As Bloomberg notes, some lenders converted 80% of trial modifications into permanent modifications while others converted as few as 30%. And, added Pro Publica, quoting from the report, a “few large servicers [have offered] modifications at half the rate of others."

• Why did the mortgage-modificatio​n plans fail?

The study found that the financial incentives offered to the banks by HAMP were not enough to propel them to hire more and better staff. Bloomberg wrote:

The researchers did find strong correlation between a servicer’s success with HAMP and the operational skill it had before the program was introduced. Banks that previously had fewer loans per employee, more training for staff and shorter wait times for phone calls took far more advantage of HAMP. Banks with weaker infrastructure previously — mostly the largest servicers — didn’t take up the program en masse relative to the size of their portfolios.

The report does not identify which banks were guilty of poor performance with HAMP, "but it's not hard to ID them," writes Pro Publica, which has done extensive investigative reporting on the foreclosure crisis. It lists the largest mortgage servicers as Bank of America, JPMorgan Chase, Wells Fargo and Citi.

• Nearly half of under-40 borrowers are underwater

The study's authors write: "If these worse-performing banks had simply modified loans at the same pace as their better-performing peers, then HAMP would have produced about 800,000 more modifications. Instead of about 1.2 million modifications by the end of this year, HAMP would have resulted in about 2 million."