Treasury is becoming impatient with servicer performance despite their investments and success with processing trial loan modifications.

The program was/is targeted to help 3-4 million homeowners that were distressed or where imminent default within 60 days was likely. Treasury provided servicers with real economic incentive to aggressively pursue and negotiate loan modifications with the prospect of an up-front fee of $1,000 for each modification ($1,500 if the borrower was current) and $1,000 a year in which the borrower makes their modified payments. Consider that net income to servicers was $161 in 2008, per MBA Cost Study, and you’ve got one heck of an opportunity to make a lot of money while “doing good” as a servicer.

Servicers have hired thousands of people over the last year to handle the massive demand for modification services triggered by the Treasury’s Home Affordable Modification Program. Yet, Treasury claims that “only a tiny fraction” of trial modifications have been made permanent.” That despite the trial period being extended to 5 months.

The problem is that servicers have to field 5 calls for every 1 that appears to qualify. Of the borrowers that appear to qualify and that provide the necessary information to process a loan modification request, only a handful are actually returning the supporting documentation and signed agreements. This is occurring even though the number of documents that a modification applicant has to sign is down to only two, and many servicers are not even requiring borrowers to fully document their income, i.e. stated income.

In an effort to get servicers to be even more diligent in improving conversion rates, Treasury is now telling servicers that they will not receive “a penny” from them until and unless the temporary modification converts to a permanent modification. While this would incent servicers to work every more diligently to convert trial modifications in the pipeline, I would be concerned that servicers now bare fallout costs for issues they cannot control, i.e. over indebtedness, unemployment, negative equity, etc.

My fear is that the compelling incentive - $1,000 upfront and $1,000 a year – now has a condition that makes it uneconomical for servicers to comply and actually creates a massive disincentive for servicers to pursue and process trial modification applicants.