This past December, the U.S. Office of the Comptroller of the Currency and the Office of Thrift Supervision published a joint report (PDF: bit.ly/ decemberreport) that suggests that more than half of loans modified in the first quarter of 2008 defaulted again and were 30 or more days past due within six months of modification. Particularly considering that real estate prices continue to decline across the country, servicers argue that the time and expense of a modification might not be worthwhile if the loan would later default anyway.

Making mods work

There are ways brokers can help increase the success of modification programs. These include promotion of the following:

• Rigorously designed and validated models for determining the expected value of modifications: While some push for immediate decisions from these models, others believe that they should consider various modification options and terms in more depth to determine if the borrower really can repay the loan. Brokers also can advocate for appropriate variables in these models' design. These include credit scores, mortgage history, overall debt-to-income ratio, net disposable income, employment stability and length of residence. The models also should consider the extent of borrower equity after the modification and expected property-value changes.

• Programs that capture and evaluate data regarding modification performance: One of the biggest risks associated with developing effective loan-modification-decision models is the lack of sufficient data regarding post-modification performance. Although servicers must establish initial criteria based on reasonable expectations -- rather than verified, historical data -- they also must identify data points to capture regarding borrower characteristics, modification terms and post-modification loan performance. Analysis of this data also helps pinpoint potential improvements.

• Borrower-outreach programs: Servicers must ensure that borrowers know about modification programs and the benefits of those programs. Outreach efforts could include alternative methods of contacting borrowers and a seamless integration of collection and modification activities that delivers a consistent message.

• Consistent treatment of all modification requests: This also is an element of the Homeowner Affordability and Stability and Making Home Affordable plans. Model criteria should be monitored based on disparate results that could yield violations of the Fair Housing Act, as well.

Loan modifications are not a stand-alone solution to the ongoing housing crisis. But they can provide a sustainable solution for many troubled borrowers -- including the estimated 6 million homeowners expected to face foreclosure in the next three years, according to HUD Secretary Shaun Donovan.

In these cases, modifications also can maximize investors' returns.

Streamlined modification programs that are properly designed, implemented and tracked can bring successful modifications to fruition. Mortgage brokers can promote these programs and work to help servicers solve the widespread problem of loan defaults -- all the while staying current with regulatory changes and initiatives.

Carol Beaumier is executive vice president of global industry programs and leader of the global financial-crisis team at Protiviti, a business-consulting and internal-audit firm composed of experts specializing in risk, advisory and transaction services. Michael Brauneis is a director in Protiviti's regulatory-consulting practice. Protiviti has led mortgage lenders in designing, implementing and monitoring loan-modification programs. Contact Beaumier at (212) 603-8337 or carol.beaumier@protiviti.com. Contact Brauneis at  (312) 476-6327 or michael.brauneis@protiviti.com. Visit www.protiviti.com.

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