* Geithner-Donovan: System is "broken, should be fixed"
* Servicers now have little incentive to rework loans
(adds Geithner-Donovan statement, background)
By Corbett B. Daly
WASHINGTON (Reuters) - The Obama administration
Tuesday stepped up efforts to make it easier for struggling
homeowners to renegotiate the terms of their mortgage, although
it could be more than a year before such efforts pay off.
The way mortgage servicers -- firms that collect loan
payments on behalf of a loan's owner -- are paid is
fundamentally "broken and should be fixed," Treasury Secretary
Timothy Geithner and Housing and Urban Development Secretary
Shaun Donovan said in a joint statement.
Geithner and Donovan's comments followed news the regulator
for mortgage finance giants Fannie Mae and Freddie Mac said it
would consider new ways for mortgage servicers to be
compensated in order to make it easier to modify loan terms for
The existing system for mortgage servicers provides little
flexibility to change easily the terms of the loan if a
borrower falls behind on monthly payments.
"The current model has not motivated mortgage servicers to
invest the time, effort and resources needed to fully explore
all options to help delinquent borrowers avoid foreclosure,"
Donovan and Geithner said, echoing the Federal Housing Finance
As it now stands, servicers are paid a monthly fee for
collecting payments on performing loans. When those loans go
bad, the monthly fees decline, giving the servicer little
incentive to make an effort to communicate with the borrower,
let alone work out new terms for the borrower, a time-consuming
and costly process.
Critics have said this compensation structure is a key
reason the number of loans modified for struggling borrowers
has been relatively modest.
The Federal Housing Finance Agency said it is seeking input
from industry, consumer groups, investors and other government
agencies for ideas on how to change the system. Changes to the
system are not expected to take place before the middle of next
year, the agency said.
Just more than 500,000 borrowers have thus far received a
permanent loan modification under the Home Affordable
Modification Program, which is the administration's signature
foreclosure prevention effort.
Banks seized more than 1 million U.S. homes in one year for
the first time in 2010 as millions of home loans went bad amid
high unemployment and a severe housing slump.
(Reporting by Corbett B. Daly; Editing by David Storey and
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