| Consensus is finally forming around proposals to increase focus on modifying mortgage loans -- FDIC, President Elect Obama, and others such as Chairmen Frank and Dodd, continue to press for loan mods as the path out of the wilderness Some suggest lenders and loan servicers should be persuaded to pursue loan mods by the benefits they would realize from reducing foreclosures. Others suggest a government guarantee for loan modifications to encourage servicers.
With or without a government guarantee, the FDIC and others should first explore how lenders and servicers will reliably execute loan modifications on a large scale. Unfortunately, most lenders and servicers are not in a position to modify loans on a large scale in a responsible fashion with speed. Fortunately, this a problem that can be greatly improved and facilitated with new technology now available to perform loan-by-loan assessment….fast, at scale, reliably, and objectively.
Consider two critical challenges of loan modifications:
* One of the underlying problems of the current crisis is that loans were poorly underwritten in the first place. If we launch into rapid loan modifications – especially if there is a government guarantee – we could simply create a new round of poorly underwritten loans waiting to be written-off or rescued down the line. Good underwriting is critical for the new loan, and the right product must be selected, for the new loan to be sustainable.
* Lenders and servicers are faced with hundreds of thousands of loans in distress, and hundreds of thousands more that are at risk. The scale is enormous and a servicer could risk devoting endless hours chasing consumers who are not the best candidates for loan mods. How does a servicer identify where to devote its efforts? Again, a loan-by-loan assessment can identify which loans are ripe for modifications of different types, which could probably be refinanced to lower monthly payments, which likely to be unrecoverable.
For lenders and servicers, the answer is clear – invest in carefully targeted technology immediately to enable loan by loan decisioning.
For policy-makers, the challenges suggest simple encouragement, and even a guarantee for loan mods, might not be enough. One approach could be a facility that enables automated loan-by-loan re-underwriting according to certain basic standards, such as the FDIC’s guidelines. See here.
More to follow on other challenges of loan modifications…. Including leading servicers out of the securitization maze... | 
