Jack M. Guttentag The Mortgage Professor

Will Project Lifeline truly be a lifeline for distressed borrowers?

On February 12, six large lenders who service about half of all home mortgages unveiled the plan, a program to save some borrowers from foreclosure. These borrowers have not contacted their servicer about their problem; under Project Lifeline, the servicers will write to them.

The borrowers will be told to contact the lender within 10 days, indicating whether or not they want to stay in their home and, if so, whether they will be willing to seek counseling.

The borrower who says yes to this is asked to provide updated financial information so the servicer can explore the possibility of a contract modification. If foreclosure is under way or imminent, it will be placed on pause for up to 30 days while a work-out plan is developed. If the borrower follows the plan for three months, the modification is made permanent.

Every borrower delinquent for 90 days or more is eligible regardless of what kind of loan they have, provided they are not in bankruptcy or foreclosure and are occupying the property. Borrowers with investment properties are not eligible.

The operating premise of Project Lifeline is that borrower denial -- a refusal to recognize a serious problem -- is a major reason why more borrowers in distress have not had their loan contracts modified. There is no question that borrower denial is a problem, and reaching out to distressed borrowers is certainly a good idea. Those that don't respond are presumably beyond help, while those that do respond are potentially salvageable.

The big question is how effective the servicers will be at salvaging them?

Presumably one barrier to their effectiveness has been removed. When the crisis first hit last year, servicers were ill-equipped to deal with it, and borrowers in trouble who took the initiative to contact servicers often got nowhere. With servicers now inviting borrowers in trouble to contact them, it is plausible that the staffing and operational problems that made them so unresponsive earlier have been solved.

My major concern is that the modification conversion rates -- modifications as a percent of borrowers considered for modification -- will prove to be too low. My impression is that many modifications that would be advantageous to both borrower and investor are not getting done. Certainly borrower denial and unresponsiveness are the cause of some of these, but my surmise is that servicers are responsible for many more. This surmise is based partly on feedback I get from borrowers, and partly on the lack of transparency in the process.

When foreclosures are a rare event, nobody much cares about the process and its shortcomings, except for the few borrowers involved. When foreclosures are so numerous that they threaten to drag down the entire housing finance system, and perhaps the economy, the ground rules have to change. There is just too much at stake.

Here are some of the questions I intend to put to the major servicers involved in Project Lifeline, and perhaps others:

1. What are your criteria for deciding whether or not to do a modification in a particular case? Do your loan counselors have written instructions about this?

2. Do you or will you compile any data on your modification conversion rate?

3. Do you or will you compile any data on the relative importance of the different types of modification: rate reduction, term extension, balance reduction, and others?

4. Do you or will you compile any data on the reasons why modifications were not approved?

5. How do you handle a modification request when the borrower has a second mortgage with a different lender?

6. In handling a modification request, do you use different criteria when you own the loan than when you are servicing the loan for another investor? If so, what are the differences?

7. In handling a modification request, do you use different criteria when the loan carries private mortgage insurance than when it doesn't? If so, what are the differences?

8. In view of what is at stake in these issues, do you plan to publish information on the criteria used to evaluate modification requests, and data on numbers and types of modifications, so that the public can judge how well you are handling your awesome responsibilities?

In a future article, I'll report on what I find.