Banks stalling in Housing Crisis

A key component of Obama's housing rescue plan is an effort to restructure--or modify--as many as 4 million troubled loans. So far, about 325,000 modification offers have been made through the program, according to Bloomberg news. The program is having an impact for certain individual borrowers, but the efforts--at least so far--have not put much of a dent into the national foreclosure epidemic. Borrowers have complained of long delays and bureaucratic hurdles in their efforts to modify their mortgages.

Though the administration's effort includes incentive payments to convince servicers to modify the loans, some banks may find it less costly to foreclose on the property. There is going to be some pressure from the administration to get banks to start renegotiating more loans. "But if [modification is] not in [the servicer's] self-interest,they're not going to do much."

Mounting political pressure: Mortgage services appear to be facing mounting pressure from Washington to redouble their efforts. "We believe there is a general need for servicers to devote substantially more resources to this program for it to fully succeed and achieve the objectives we all share," Treasury Secretary Tim Geithner and HUD chief Shaun Donovan said in a recent letter to 25 mortgage servicing firms.

In a hearing last week, Senate Banking Committee Chairman Christopher Dodd, a Democrat from Connecticut, expressed his frustration more directly. "Why am I still reading about lost files, understaffed and undertrained servicers, and hours spent on hold on the phone?" Dodd said in a prepared opening statement. "Why are servicers and lenders refusing to accept principal reduction so that homeowners can start building equity and get the housing market moving again?"

Foreclosure outlook: Despite this pressure, Newport expects foreclosure rates to creep higher for the next year or so. "It's going to keep on getting worse until the unemployment rate peaks, which we think will happen in about the middle of next year," he says. For her part, Chen argues that a successful mortgage rescue program could expedite a housing recovery. "The hope is that we will be able to push through enough mortgage modifications to prevent home prices from falling too much more," she said.