Millions of Americans who are struggling to save their homes from foreclosure are trapped in a labyrinth of disappointment and misinformation created by the very institutions they’ve been told are trying to help them.
Ten months into the government’s third program in two years to stop a record wave of foreclosures, homeowners, housing counselors, consumer advocates and attorneys working with borrowers report that the latest effort is falling far short of its goal. In many cases, lenders are moving to foreclose even after homeowners get approved for loan modification, housing counselors and attorneys say.
The problem, they say, goes beyond the paperwork snafus and staffing shortages at lenders and mortgage servicers that have created massive bottlenecks for the millions at risk of losing their homes. Those have plagued the government’s foreclosure relief efforts since the first government-industry joint program, the Hope Now Alliance, was launched in October 2007.
Homeowners face numerous hurdles trying to get their mortgage modified. In some cases, applications are rejected with little or no explanation. It’s impossible to independently verify if a homeowner qualifies because the Treasury has not disclosed the eligibility formula used by lenders — a complex set of calculations that housing counselors and consumer attorneys have dubbed “the black box.” Housing attorneys report that some lenders are ignoring the program’s guidelines altogether and moving to foreclose without properly reviewing mortgages for possible modification.
“It’s been a stubborn challenge," said a Treasury official, who agreed to an interview but requested anonymity. "But this is something that’s never been done before."
Many of the urgent problems with the government’s $75 billion Home Affordable Modification Program, or HAMP, are systemic. They can be traced to its basic guidelines for lenders and mortgage servicers — the companies tasked with collecting payments from homeowners and forwarding them to the investors holding a homeowner’s mortgage.
Launched last March as part of the Making Home Affordable initiative, HAMP was the Obama administration’s flagship program to halt a wave of foreclosures that two previous government efforts — the Hope Now Alliance and Hope for Homeowners — had failed to slow. In return for signing on to the program, lenders and mortgage servicers who agree to follow standard loan modification guidelines are paid a taxpayer-funded bounty of up to $4,000 for each loan they modify. Homeowners begin with a “trial” modification that is supposed to be made permanent if they keep up with payments for six months.
The HAMP guidelines call on lenders to try to modify every mortgage before moving to foreclosure. But that’s not what’s happening, according to a survey of more than 100 housing attorneys by the National Association of Consumer Advocates.
“Ninety-five percent (of the attorneys surveyed) said that a (mortgage) servicer had attempted to proceed with a foreclosure sale without a proper HAMP review,” said Ellen Taverna, a NACA associate who conducted the survey. Nearly half the housing attorneys said they have represented 10 or more households who had faced a foreclosure without a proper loan review; 14 percent said they have represented 50 or more households in that situation.
So far, the HAMP program hasn’t slowed a record pace of foreclosures. Some 2.8 million households were threatened with foreclosure last year, according to RealtyTrac, a Web site that tracks foreclosure filing nationwide. The company estimates the figure could rise to 3.5 million this year as payments reset on a wave of "pay option" adjustable-rate mortgages, so borrowers have more to pay on homes that are worth less.
Frustrated by the lack of progress with loan modifications, some homeowners are giving up and choosing “strategic default” — simply walking away from their homes. Those defaults, and the ongoing wave of foreclosures, will continue to weigh on the housing market, holding back the nascent economic recovery.
Saving a home from foreclosure can be as simple as rewriting a costly, high-rate subprime loan to prevailing mortgage market rates. If that doesn’t bring the payment to within roughly 31 percent of a homeowners’ monthly income, HAMP guidelines require mortgage servicers to follow a step-by-step process to cut mortgage payments further. First, they can write down the interest rate to as low as 2 percent and then stretch the term of the loan to 40 years. If that doesn’t work, lenders can cut the amount of principal owed.
But cutting principal is entirely voluntary, and most lenders aren’t doing so, housing counselors and attorneys say.
“I don’t think it’s common at all,” said Helene Reynaud, vice president of national grants for the National Foundation for Credit Counseling. “When we ask our counselors, they never seem to see them. Or very, very rarely.”
'More confused than ever'
Even if homeowners who get a “trial” modification and make each new payment on time can still lose their home.
“The foreclosure and loan modification proceed on two separate tracks,” said Diane Thompson, an attorney with the National Consumer Law Center, who recently wrote a report on financial incentives that often encourage mortgage services to foreclose. “If you allow the foreclosure process to continue you’re going to end up with (foreclosure) sales because there’s not good communication between those two divisions in servicers.”
That’s what happened to Courtney Scott, a retired nurse living in an Atlanta suburb, who has spent the last two years trying to get Bank of America to modify her loan.