In an American Banker article titled Shame May Be Only Stick U.S. Holds Over Mortgage Servicers servicers with a lower number of trial modification explain that the lower level is caused by underwriting the loan upfront before the trial mod is given instead of giving the trial mod based on verbal information and then later underwriting the modification.
From Wells Fargo:
Heid said, saying the servicer did not want to put borrowers in a trial modification and later re-underwrite the loan. "We took more of a 'gather the documents first' path. We wanted to make sure that we had the actual pay stub, the actual tax returns in hand… Now that we've got some operating experience on the program, we feel we can be less restrictive on that."
Ron Faris, president of Ocwen Financial Corp., which helped 5% of its eligible borrowers, said in an earnings call Tuesday that some of the numbers are deceiving. He said some servicers are just taking verbal income information from the borrower and sending them an offer immediately, following up at a later time with required information. He argued such a method would result in a high number of modifications initially, but they may not last.
Other institutions, like Ocwen, are requiring borrowers to submit all the documentation first before underwriting a modification.
Offering a trial modification based on verbal information seems like a very bad idea. It doesn't take long to produce income and employment documentation, run a credit report or sign a 4506-T (allowing the servicer to get the borrowers tax returns). Full underwriting does take longer but will have to be done anyways before giving out the full modification. Why not do it up front? If you were an investor and saw your servicer handing out trial mods so easily wouldn't you be worried? The servicer is the fiduciary to the investor not the borrower and it is looking like some servicers are caving to political pressure knowing ultimately the money they lose by handing out more modifications than prudent is not their own. In fact the HAMP and related programs incentivize the servicers to set aside their fiduciary duty.
As I sit back watching all of this unfold I keep asking myself who (besides the Federal Reserve) would ever buy a mortgage bond ever again.