Uncertainty in the Loan Mod Process is Barrier to U.S. Economic Growth


Five years after the Home Affordable Modification Program (“HAMP”) first flummoxed American homeowners and we’ve managed to prove a few things to be true that previously I would not have thought possible…

1. That we are incapable of creating a loan modification process that works with any consistency or that anyone can claim to understand.  Think I’m exaggerating?  Okay, fine… then try any of these:

  • Can you get a HAMP Tier 2 on an FHA loan that’s over 12 months delinquent?
  • When will Fannie Mae only grant a forbearance and why?
  • Does HSBC participate in HAMP as an investor or a servicer?
  • Is qualifying for a DOJ modification the same at all servicers?
  • Describe the basis upon which short sales are approved or denied?

Had enough?  I thought so.

2. That we are pretty much incapable of getting better at modifying loans no matter how hared or long we try. It is apparently an exception to the “practice makes perfect” rule. I mean, we got better at space travel over time, but if loan modifications were like space travel, we’d have watched the Challenger explode monthly since 2009.

Based on any objective data, it’s much more difficult to improve one’s ability to modify loans than it is to get better at performing successful heart bypass surgery on toddlers.

3. That the President of the United States can introduce a $75 billion program… describe it as being absolutely crucial to our economic recovery during the worst recession in 70 years… and then upon seeing it fail, simply not mention it again… and still get reelected without the topic of your failure ever being raised… even by your opponent.

4. That even though at least a third of affected homeowners remains underwater… and even though its become much more difficult and costly to qualify for a mortgage… and even after 6 million homes have been lost to foreclosure… and with 53 percent of vacant homes remaining off the market… with unemployment still twice what it was in 2005, median household incomes having fallen for five consecutive years, and home prices in decline since last June…THE HOUSING MARKET IS SAID TO BE RECOVERING ANYWAY.

5. That minority communities can be ravaged by both predatory lending and predatory foreclosing, and not one African American celebrity will so much as mention it, let alone lift a finger to do anything to stop it.  If Haiti has an earthquake, however, the benefit concert  looks like Night at the Apollo.

But, the foreclosure crisis has particularly devastated the African-American community, which has lost over half its wealth as a result, according to various estimates by groups studying the problem.  And African American and Latino borrowers experience roughly double the foreclosure rate of white borrowers.  So, the next time you hear someone say they think that foreclosures are caused by “irresponsible borrowing,” tell them the statistics and ask them if they’re saying that black and brown people are twice as irresponsible as white borrowers?  Then leave them to stew in their own inexcusable ignorance.

Laura Gottesdiener, in her book, “A Dream Foreclosed: Black America and the Right for a Place to Call Home,” (Zuccotti Park Press, 2013, 208 pages), writes…

“Because of the deep and enduring connection between property and personhood, today’s ongoing wave of racially tilted displacement is part of a long history of denying full human citizenship rights to African Americans and other people of color. It’s a history, often suppressed or ignored, that began the moment Europeans set foot on North America and Africa, and continues to the present day.”

But the media, simply sees no reason to cover it as a crisis… at best, it’s a “tragic story” of some elderly lady forced to move in with her children after borrowing more than she could repay on her home.

Five years into this crisis… such coverage is appalling.



Sure About the Impact of Uncertainty…

Economists don’t all agree on much, but it is almost  universally understood by economists all over the world that uncertainty can significantly impede investment and hiring by firms because they will not be willing to make decisions that they fear may soon need to be reversed and at a high cost… and the impact on households is no different. 

When people are uncertain about the future, they simply tend to adopt a more cautious stance in their spending behavior.

The result is a slowdown in productivity growth, creating an economic contraction that worsens medium- and long-term prospects, which in turn creates even more uncertainty.  It’s a negative feedback loop that can lead to a deflationary collapse if not effectively addressed.  And we know this to be true… it’s not mere theory.

And in fact, recent research has identified uncertainty as undermining macroeconomic performance here in the U.S.

A 2013 study by Scott Baker, Nicholas Bloom, and Steven Davis, (Stanford Center for Economic Performance and University of Chicago Booth School of Business, respectively), showed that policy uncertainty goes a long way towards explaining the depressed levels of US output growth seen since the recession’s supposed end in 2009.

The authors concluded that high levels of policy uncertainty foreshadowed lower levels of output, investment, and employment.  Their macro-econometric model estimated the increase in policy uncertainty after 2007 to have reduced employment by an additional 2.3 million jobs here in the U.S. alone.

In addition, there is quantitative evidence that policy uncertainty is causing our country economic harm.  The National Federation of Independent Businesses survey in 2012, reported that 35 percent of small firms said “uncertainty related to government action” was a limiting factor, sharing third place with the “cost of fuel.”

The same survey showed that top two concerns of smaller business were the “cost of health insurance” (52%) and “general uncertainty over economic conditions” (38%), however, larger businesses and government agencies also cited policy uncertainty among their primary concerns.

It’s both fascinating and troubling that while Republicans are blaming Democrats for creating regulatory uncertainty by imposing harmful new rules… and Democrats are blaming Republicans for being obstructionists consumed by the ideas of tax and spending cuts above all else… the only outcome of the political process becomes increased levels of uncertainty.

And as Bill McNabb stated quite succinctly in his OpEd piece, “Uncertainty is the Enemy of Recovery,” that appeared in the WSJ on April 28, 2013…

“Quite simply, if firms can’t see a clear road to economic recovery ahead, they’re not going to hire and they’re not going to spend.  It’s what economists call a “deadweight loss”—loss caused by inefficiency.”

I’d have to say that no truer words have ever been spoken, but…  

My question is… why doesn’t anyone talk about the monument to uncertainty that’s been placed square on the collective chest of the American homeowner… the loan modification process?  It’s the proverbial life preserver for the underwater homeowner at risk of losing a home to foreclosure that sinks more often than it floats… and often times no one knows why.  And it’s the poster-child for uncertainty.

It’s as if we’ve created the cruelest of jokes for use at the most inappropriate of times.  Someone realizes that foreclosure is a risk, reaches out for help from the federal program, and some percentage of the time they receive an actual life vest, while at other moments what’s slipped around their necks is attached to a cement block.  And it’s anyone’s guess as to which happens when.

It’s like pulling a prank on the Fire Department by pumping gasoline into fire hydrants instead of water.  Building catches on fire, and firemen end up hooking up their hoses and pumping gas on it… HAHAHAHAHA… come on, wouldn’t that be hysterical.   What a great gag.

The simple fact is that the loan modification process we’ve created, if it does nothing else, inspires copious amounts of uncertainty.  Anyone that’s been anywhere near it will tell you that… so what’s the impact of that uncertainty on our economy’s recovery?  There must be a significant negative impact, right?  It’s certainly significant amounts of uncertainty… and we’ve already established that uncertainty is a significant impediment to economic growth, have we not?

Are you starting to see the significance of what I’m building up to here?  If they want to blame the economy on uncertainty… fine.  But you can’t do that and ignore the impact of the loan mod process on uncertainty at the same time.  It’s got to be one way or the other.  Either uncertainty matters to our economic growth or it doesn’t.  

Consumer spending, when I was in graduate school, was generally said to be responsible for roughly 70 percent of our Gross Domestic Product (“GDP”).  I’m not here to debate whether that’s the right percentage or not, I’m only trying to point out that whatever the amount of GDP being driven by consumer spending, it’s big.

So, it stands to reason that if you have tens of millions of American consumers being pumped full of uncertainty as they learn from either their experience or the experience of others, that should they find themselves at risk of foreclosure tomorrow, next year, or the year after that… they have no idea what will happen as a result.

Maybe they’ll lose their home, which in addition to being a roof over their heads, has also served as their financial security blanket… and in many cases, a big part of their retirement nest egg.  Or, maybe they won’t, but that’s the point… it’s a 50/50 proposition.


And another way of saying that something has a 50/50 sort of chance of occurring is that the outcome is RANDOM… as in, there’s no way to predict it… like flipping a coin and trying to guess whether it come up heads or tails on any given toss.  It’s the very essence of uncertainty.

It doesn’t matter whether the homeowner is at risk of foreclosure today, or knows that he or she will be at any time in the future.  All homeowners need to realize is that once their mortgage is underwater… should they get hit with a life event such as a divorce, illness, injury, job loss or income reduction… they can’t sell their home… and they can’t borrow against it to help them get through the bump in the road.

So, once they’ve exhausted their ability to make the mortgage payment, what’s looming is the uncertainty of the loan mod process… followed by the unpleasant to terrifying certainty of foreclosure and the loss of their family’s home.

We can quibble of the numbers if you’d like, but we’ve got 15 million underwater mortgages in this country today… and with two adults per household, that’s 30 million adults… figure we’ve already lost six million homes to foreclosure, so add another 12 million and so that 42 million people being directly impacted by the uncertainty of the loan modification process we seem to be unwilling to fix.

Don’t tell me we can’t fix it, because that’s complete nonsense. 

The National Mortgage Settlement mandated that Bank of America grant several billion dollars in principal reductions for delinquent borrowers.  In response, the bank contacted the trustees to request permission to reduce the loan balances under certain circumstances, and 75 percent agreed.

Bank of America was given three years to complete the billions in principal reductions.  I believe you’ll find they were all done in less than six months, but I’m completely certain they were done well within a year.

And if we figured out how to put Japanese Americans into internment camps during World War II, I’m confident we can figure out how to get around some contract limitation found in some Pooling & Servicing Agreement somewhere.

So, we obviously can create a better loan modification process when we want to… we can create a process that works so well that even when allotted three years to complete a given task, we can complete it in roughly six months.  Now that’s some serious efficiency right there, I’ll tell you what.

But, again… five years since the loan modification process began under the HAMP fiasco, and we’re pretty darn close to running in place as far as the whole foreclosure crisis and economic recovery goes.  We have about the same number of delinquent borrowers today as we did in 2009.  And while I’d have to agree that the overall level of unpleasantness associated with getting a loan modified has been reduced by some appreciable amount, the uncertainty inherent to the process is about the same.

We’re modifying a few more loans than we used to, but what should we say… that in recent coin tosses, more coins have come up heads than tails?  So what?  Random, after all, remains random always.  As long as the system we’re using is coin toss based, the odds of it producing a more predictable result aren’t going to change… ever.

And if we want to see our economy even flirt with any sort of actual recovery, we need to reduce the mammoth amounts of uncertainty that tens of millions of American homeowners now know may impact their futures due to no fault of their own… and no matter what they do to try to prevent it.  They may not be at risk of foreclosure today… they may never be… but we all know one thing:

If we do find ourselves at risk of losing our home to foreclosure… anything can happen… we’re as likely to save it with a modification as we are to lose it to the auction block… we think… or not… I really don’t know, you see, it depends. 

Who’s the servicer?  Is the loan owned by Fannie or Freddie?  FHA?  Are there any restrictions on how and when loans in the trust may be modified?  Will you pass the NPV test?  What if you forget to check a box, or miss a deadline by a day?  What if it’s raining?

(That last one was just for effect… I don’t think rain has anything to do with it… although I can’t even be positive about that, now that I think about it… so what if it’s raining in London and you’re investor is HSBC?  I can’t remember… was the whole manipulating LIBOR thing good for homeowners or bad for homeowners?)

See… you get on this path and before you know it, you can’t be certain of anything.  So, you reduce or reallocate your spending… you become more hesitant about starting some new venture that, were you not consumed by the uncertainty emanating from the consistently stupefying loan modification process, you’d jump at in a heartbeat.


Former Fed chief Alan Greenspan once said that “the inability to understand external events almost invariably induces fear and, hence, disengagement from an activity, whether it be entering a dark room or taking positions in markets.”

Oh yeah… well, Alan?  Psssst… yeah… over here.  Look, here’s your chance to redeem your tattered reputation as chief bubble-headed bubble-blower… someone might listen to you about this… you could write a paper about it… that it’s not foreclosures that are suppressing job growth, it’s the uncertainty about the future inspired by a process of our own design.  We built it, and we can change its design… if we want to.

So, do we want economic growth, increasing jobs and wages, and a higher standard of living in the future than we had in the past?  Or, would we prefer to hang onto to an uncertain process whose outcomes are as predictable as if guided by flipping coins?

At this point, rather than the status quo, I think we’d be better off with anything but paralyzing amounts of uncertainty about something as important as our homes, so if we want to say we can’t fix it… then lets just stop all modifications.  Or, tell everyone that we’re going to start granting them based on Golden Tickets found by homeowners in chocolate Wonky Bars.

Anything will be better for the economy than the loan mod process we have today… the one born of one of the most ill-conceived, and hastily put together government programs in the history of this country… it’s like our national version of NEW COKE.

Well, one way or the other… we don’t have to live with the product of bad decision making forever…  and of that, I could not be more sure.

Ahhh… I’m feeling better about things already… see how good even a little certainty can make you feel?

Mandelman out.


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