Real Time Economics : Guest Post: Quickly Building "Industrial Strength" Homeowner Relief: Amid reports that the Treasury, the FDIC and other government agencies are close to announcing a government program to address residential foreclosures, much debate has centered around how such a program can be structured. John Kocjan, who leads Deloitte Consulting’s financial services practice, offers some ideas. He suggests the government work closely with the private sector to build an “industrial strength” program.
Now that the Treasury’s Troubled Asset Relief Program has helped stabilize the financial system by injecting capital into some of the nation’s biggest banks, the focus is shifting to the plan’s initiative on providing relief to distressed homeowners through loan modification. It’s one of the biggest challenges the plan could potentially face.
This initiative has received less attention so far (much less the mechanics of how this could work), but a number of government officials have made it a priority. As recently as Wednesday, the Treasury and the Federal Deposit Insurance Corp. has proposed a plan to guarantee the mortgages of up to 3 million homeowners. And FDIC Chairman Sheila Bair last week told the Senate Banking Committee, “There has been some progress — but it’s not been enough, and we need to act quickly and we need to act dramatically.”
With more than 765,000 foreclosures in the third quarter, each passing day sees an already dire situation deteriorate further. Fortunately, the nation already has the resources to address this challenge. But they must be mobilized in an effective, efficient manner for this phase of TARP to succeed.
Specifically, a broad-based homeowner relief program must answer the following questions:
Which borrowers would qualify? How can the program distinguish between those in need who may benefit and those beyond assistance? How can they target the right borrowers with the right remedies, while minimizing cost to the taxpayer? How can the program execute the modifications quickly and then monitor the modified loans’ performance? What are the best ways to motivate banks, loan servicers and investors to cooperate with the program? How can we ensure that accounting, performance metrics, reporting and communications are transparent and secure?
Fortunately, there are already several programs for distressed homeowners underway, albeit on a much smaller scale, like the FDIC’s program for borrowers whose loans are serviced by IndyMac Bank, and the FHA’s Hope for Homeowners program. These programs have provided relief to thousands.
However, mobilizing a TARP-style, “industrial strength” program will involve working with potentially millions of homeowners and hundreds of lenders and loan servicers. Many homeowners will be unaware of the program, and many will be wary of working with the government to modify their loans. It will be critical to get to these borrowers quickly, before their homes are foreclosed. Here are three suggestions to consider in any effort to quickly design and launch an industrial-strength program
Create a Program Mobilization Office
A program mobilization office (PMO) must be quickly established to organize, govern and operate this massive initiative. Commonly used by large corporations to handle crises or events such as major mergers, a PMO functions as a “mission control,” coordinating planning and execution, managing external vendors, resolving conflicts, and functioning as a clearinghouse for reporting. This is not something akin to a passive “special committee,” as we often hear about in Washington, but an action-oriented team.
The PMO would be staffed with mortgage, operations, regulatory, accounting and other specialists from the public sector and private industry. This team would design the loan modification organization, agree on a governance model for all relevant parties, manage information, develop protocols for borrowers-lender dealings and ensure accurate program accounting and transparency.
Leverage Private Sector Infrastructure
While the government lacks the resources to quickly target qualified borrowers — much less contact them, encourage them to apply and, most importantly, execute the loan modifications — these capabilities exist in the private sector. The PMO would therefore weave together several private-sector participants with the resources and skills needed to scale up the operation.
For example, mass-marketer specialists like credit card issuers, have the infrastructure, experience, and analytical capabilities to develop “promotions” to millions of borrowers in a matter of weeks, while operating under the strict supervision and oversight of the PMO. The marketing would be “private-labeled” on behalf of the TARP, with absolutely no mention of the card issuers’ brand. Such marketers could also contribute to advanced analytical techniques needed to segment those borrowers who would qualify for relief. Moreover, they also have the fulfillment capabilities, including call centers, mailing operations, and websites to elicit and capture responses from large populations. They are specialists at devising “customer-friendly” marketing strategies and communications aimed at maximizing response rates from targeted borrowers.
The program would also require a central repository of information on borrowers and their loans, in order to target the right borrowers and devise an appropriate modification plan. Or, to accomplish this, a “Master Servicing Custodian” could be created by leveraging existing industry vendors or by leveraging the facilities available at Fannie Mae or Freddie Mac, which perform a similar function for their securities. With all borrower information in the same place, each can be assessed for help on an equal footing. Obviously all information would be controlled by the government under the strictest privacy provisions.
Create a Virtual Loan Modification Committee
Acting more like a clearinghouse, this committee would design and promulgate loan modification solutions to loan servicers and borrowers. The solutions could combine, in different permutations, a few standard tools, such as term or rate adjustments, direct grants or even “leapfrog loans” to let borrowers prepay all or part of their obligations and perhaps credit insurance for lenders and investors in exchange for partial forgiveness.
Supported by data from the Master Servicing Custodian database, and information such as local home values, the committee would apply the most appropriate tool for each borrower. These tools would incorporate “loss sharing” agreements and help empower the loan servicers to write down portions of loans in a manner that would still benefit lenders and investors. In reality, most decisions will be automated, based on underwriting protocols and software that will compare the net-present value calculations of the various alternatives against foreclosure. But the committee, comprising Treasury, the FDIC, lender, servicer, and borrower representatives, would monitor program execution and change qualification criteria and loan designs as required.
The program must also work with a large number of local loan servicers, who now manage many of the loans that will be modified. Many of these servicers are small and mid-sized banks who hold the loans or collect loan payments on behalf of large mortgage investors. Since many loan modifications might be expedited if the borrower visited a local office, these servicers must be fully versed in the loan modification processes and empowered to finalize the transactions with the borrowers.
Simply put, we need to ramp up an industrial-strength program in the immediate future, in order to reach the millions of qualified borrowers and execute the program quickly. The sooner a broad-based loan modification program is designed, developed and launched, the better.
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