Jack M. Guttentag The Mortgage Professor

With no end to the housing crisis in sight, the need to modify loan contracts to make payments more affordable is greater than ever.

While the number of modifications is rising steadily, it is running far behind the need. In the first quarter of 2009, the loan servicers reporting to the government reduced the interest rate or loan balance on only 120,465 loans. This is an annual rate of about half a million, which is no more than one-fifth of what is needed.

The widespread adoption of a Web portal that would directly connect servicers with borrowers and counselors could help change this, because the current situation in the industry is in need of repair. The portal would allow users to access a servicer's specific requirements and submit modification applications just by clicking a button.

This would automatically forward the application to the servicer, who would also be alerted by email that a new borrower file has been created. All subsequent messages by the servicer and the user, and all new documents submitted by either, would be recorded and dated in the user's file.

Also, the portal would replace communication by phone and fax with documents and messages left in the portal. The correct forms would be filled out because the user would receive them directly from the servicer. Long telephone waits, the inability to find the same person and conflicting information from different people would be eliminated. The portal would allow both parties to view all messages by sender and date, so there could be no misunderstanding of what was said, when it was said and by whom. All documents would remain in the portal and be accessed by either party.

The good news is the portal that does all these things exists. It was developed by Default Mitigation Management LLC, a firm headed by Joseph Smith. (I have no financial interest in this firm.)

Improving the Process

Right now the portal is being used by attorneys with a number of enlightened servicers who account for about three-quarters of all loans. The servicer pays a small processing fee for each file, while the attorney pays nothing.

The portal needs to be opened to counselors and borrowers, hopefully in that order. Getting counselors on the portal depends mainly on the major counseling organizations (Hope Now and Neighborworks), who have not as yet committed to it. The Treasury Department, while expressing displeasure at the slow pace of modifications, appears to be keeping its hands off.

(I have wondered whether Treasury is aware that the portal provides the means for assessing servicer performance, something it does not now have.) If the counselors don't come aboard shortly, I look for Default Mitigation Management and the servicers to open the portal to borrowers.

Generally speaking, modifying a mortgage is not that big of a deal.

"After you get the borrower's complete package, it only takes about 45 minutes from beginning to end to modify a loan," according to Smith, who has been modifying loans on a small scale for several years. "This includes reviewing a budget with the borrower (20 minutes), determining surplus income (2 minutes), completing the loan modification analysis worksheet (10 minutes), generating a special forbearance and mailing it out (10 minutes), and calling the borrower to report the result (3 minutes). A few minutes more may be needed for additional calls, generating final modification documents and follow-ups, so let's call it an hour, which is conservative."

Let's be even more conservative, assume two hours and consider an example. JPMorgan Chase has announced that it now has 3,500 loan modification counselors. Using the two-hour assumption, these workers on their own, ignoring the counselors employed by all other servicing firms, could modify 70,000 cases a week if each of them worked an eight-hour day.

More Problem Cases

Throughout the industry, there is an enormous gap between the productivity of servicers today and what is possible. The reasons for the gap are well understood. Servicers over the years focused their system development on reducing the costs of dealing with borrowers who paid. Those with payment problems were few in number and could be handled by a relatively small staff.

But as the number of problem cases has exploded, the servicers have been overwhelmed. Most have responded by substantially expanding their counseling staffs, but the systems needed for the staffs to work effectively have been lacking.

"While most loan servicers are trying to remedy the situation, progress has been slow," Smith says. "Most servicers have inadequate call routing for in-bound calls, have inadequate mail rooms, fax and image facilities, lack systems for tracking files, require excessive numbers of hand-offs in the decision process and manage largely in a fire-fighting crisis mode."

The results are well known to the borrowers and their advisers who have tried to get their loans modified. It takes forever, and sometimes it is impossible to reach the counselor with whom they had their initial contact. They may have to begin again with someone else who may not be able to find their file, and who may tell them a different story than the previous counselor.

If the borrower has not submitted all the proper forms, each one filled out correctly, the file is likely to be put aside, which the borrower may not know about unless they inquire and are lucky enough to speak to someone who knows. Files put aside often get lost, which means that the borrower has to submit the entire file again, without necessarily knowing what was wrong with the previous submission.

In some cases, a document submission gets lost in a chaotic fax room and is never logged in. When the borrower calls, no one they speak to knows anything about their submission.

Delays are compounded by needless divisions of responsibilities, including analysts who check the math and negotiators who deal with the borrower. Smith says that "if the analyst has a week of cases in his pipeline and the negotiator has the same, the borrower's total wait is two weeks, even if everything else goes smoothly."

The bottom line is that a process that could be done within the day takes weeks or months or doesn't get done at all. It doesn't have to continue to be this way.