In a press conference today, Treasury Secretary Henry Paulson and U.S. Department of Housing and Urban Development announced "Project Lifeline," a coordinated loss mitigation effort that targets all seriously delinquent borrowers. The project initially involves six of the nation's largest servicers, including Countrywide and Bank of America, and comes on the heels of a "subprime rate freeze" program that many have said is having limited success stemming the growing tide of foreclosures. The nuts-and-bolts: this new campaign targets serious delinquencies -- those 90 or more days in arrears -- and reaches across the credit spectrum to include all borrowers, not just subprime. Participating servicers will be sending a letter out to those unlucky enough to be in the target group, which kicks off a five-step plan:
  1. Call your mortgage servicer
  2. Tell the servicer you received a letter, you want to stay in your home and you are willing to seek counseling, if necessary
  3. Provide updated financial information so the servicer can explore a suitable solution
  4. If appropriate, any pending foreclosure will be ‘paused' for up to 30 days during the review process until a formal decision is made and a plan is created
  5. If a workout plan is established and the homeowner follows the plan for three consecutive months, their loan will be formally modified as they have demonstrated their ability to meet the requirements
Most HW readers that work in loan servicing are probably already shaking your heads -- wait a minute, isn't this pretty much what we already do? Well, yes. The plan is essentially a PR stunt, albeit one that has a very good purpose behind it. When you get down to it, this entire "project" is really about that very first step -- getting the borrower and the servicer in contact with one another. HW recently covered a Freddie Mac report that found more than half of borrowers are unaware of the workout options offered by their servicer. So it should be considered a great thing if this sort of government-sanctioned publicity effort gets more troubled borrowers to actually pick up the phone. I'd expect, however, that the third step will be somewhat of a hurdle. Always is. Many troubled borrowers simply balk at handing over their financials, often because fraud was involved in the original loan; and providing things like paychecks, financial statements, tax returns has a nasty way of making that fraud more apparent. I think many are still underestimating just how prevalent fraud really was during the housing run-up. The potentially new wrinkle here is the broad 30-day moratorium on foreclosure sales -- note, however, that I said sale and not process. I'd expect servicers will continue with the filing process for most foreclosures, but work to postpone the sale date if and when a borrower is flagged as a candidate for a loan modification. This is certainly a good thing to see codified, but many servicers already did this sort of thing in the past on a one-off basis whenever they thought a modification was pending. This plan just codifies it, and provides hopefully a whole boatload more of such one-off cases to consider. (Speaking of which, I didn't see any announcement from the big six in terms of staffing for this, did you? Wasn't the entire reason for the "subprime rate freeze" program a lack of available resources needed to process loan modifications?) Of course, any time a loss mitigation program gets announced, the first question any HW reader should be asking is "will it matter?" Every little bit helps, and I'm sure this will have some impact. But the truth of the matter is that there is really only so much impact that can ultimately be had; we face an affordability and housing leverage problem, and there is only so much that can be done to mitigate such a situation. HW has reported numerous times that Congressional and regulatory leaders want to see foreclosures reduced or else, and that we're as a nation looking at one million more foreclosures than would be considered normal -- and something must be done to prevent it. So the industry, the Treasury, HUD and others roll out another plan. And there will probably be another plan after this one, at some point, not to mention some really horrible legislation from Congress to boot. But something tells me that deep down, even Hammerin' Hank and the senior execs at every major bank know what needs to happen, election year posturing on Capitol Hill or not. All referenced "avoidable foreclosures" repeatedly in their statements to the media today; not "foreclosures," but only those that are avoidable. It's sort of like fighting gravity. The question is how to let gravity in the housing market run its course without also dragging down the larger U.S. economy with it, or knocking other countries off of their financial axes at the same time -- a much more complex problem to solve than in years past, thanks to the myriad of "financial innovations" that managed to embed mortgages so deeply and directly into global financial markets. I'd suspect that's precisely the sort of tug-of-war that's keeping Paulson from getting much sleep these days. It's also precisely the reason so many economists are predicting a housing-led recession, one of those rare instances of the tail wagging the proverbial dog.