Foreclosures Trump Loan Modifications

September 2nd, 2010

When President Barack Obama launched the $75 billion Home Affordable Mortgage Program a month after taking office, he touted it as a way of helping the economy by keeping as many as 3 or 4 million people out of foreclosure.

“The home mortgage crisis, the financial crisis and this broader economic crisis are all interconnected,” he said. “By making investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow — costs that are borne not just by families with troubled loans, but … by our economy as a whole.”

A year and a half later, the program has provided permanent loan modifications to 422,000 homeowners, including 6,500 in San Diego County — slightly more than one-tenth of the 4 million loans that Obama mentioned as his upper-end target. Those numbers are from the Treasury Department, which oversees the program.

In San Diego, twice as many homes have gone into default this year as have gotten permanent modifications through HAMP. And the number of borrowers in trial modifications — a preliminary step to permanent approval — has plummeted 63 percent, mirroring nationwide trends.

Many critics blame the lenders. “Sometimes lenders push modifications forward, but often they let them die on the vine,” said David McDonald, a past president of the San Diego chapter of the California Mortgage Brokers Association. McDonald said loan-servicing agencies, which oversee many of the mortgages, “tend to make more money the more delinquent a loan gets, so there’s not as much motivation for them to help borrowers.”

He said some lenders seem to keep borrowers in trial modifications long enough to drain their savings and then foreclose anyway.

Lenders say they were unprepared for the crush of modification requests they have received — Bank of America alone gets 125,000 calls a day asking for mortgage help — and that changes in HAMP’s guidelines have added time and labor to the process.

“The mortgage modification process is complex and is more cumbersome than a refinance,” said BofA spokeswoman Juwana Bauwens. She added that since the latest federal changes in June, “each case now has to be manually underwritten and approved to ensure it meets Treasury’s guidelines” before a trial modification can begin.

Treasury spokeswoman Andrea Risotto acknowledges that some of HAMP’s changes have slowed modification activity. But she added that the new procedures help ensure that modifications are workable. Only 15 percent of HAMP borrowers go back into default within nine months of the modification, instead of the redefault rates as high as 60 percent that some lenders were getting before HAMP was launched.

Since its launch, more than 1.5 million people have applied for HAMP modifications. But 246,000 didn’t make it into the trial program and 617,000 were canceled from the trials before getting permanent modifications. Half of the trial modification dropouts have found other ways to pay their loans, but 17 percent have been foreclosed upon, filed for bankruptcy or sold their home at a loss through a “short sale,” a Treasury Department survey found. Thirty percent are currently in limbo, waiting for the lender to decide how to proceed.

HAMP modifications typically cut mortgage payments by more than one-third, reducing monthly bills to 31 percent of the borrowers’ monthly income by slashing the interest rates and extending the term of the loan to 40 years. In June, the median monthly payment on modified mortgages in San Diego was $1,272, down from a premodification median of $2,152, Risotto said.

Of course, some borrowers may not be able to pay their mortgages even at that reduced rate. But the biggest obstacle from making it from a trial to a permanent modification has less to do with whether borrowers can make the payments than whether they submit the right paperwork.

“Insufficient documentation” is the top reason for canceling a trial, a Treasury Department survey found.

Critics blame the banks, saying lenders often ask borrowers to send the same documents over and over again, explaining that they have been lost.

After four months, the information becomes so dated that the entire process has to start over again. Those paperwork glitches leave many borrowers paying their mortgages with no assurance they will avert foreclosure.

“The ‘lost fax scenario’ happens frequently,” said Gabe del Rio, who heads San Diego’s HomeOwnership Center, a nonprofit agency that offers free advice to homeowners. “Lenders often say the documents have been lost or misplaced. We try to make sure they have everything they need, and wehave our clients call every two weeks to make sure everything is there, but even then there are times the borrower has to resubmit all the documents.”

Del Rio said one borrower had to submit the same profit statement 15 times over eight months before the loan was modified.

“I’m not accusing anybody of malicious intent,” he said. “The entire system is overwhelmed because nobody ever contemplated something this big. Most loan servicers (which are primarily bill collectors) have never been in the business of loan modification.” [CLICK HERE for a link to the HomeOwnership Center.]

But Mark Goldman, a loan officer with Cobalt Financial in San Diego, said “it really seems like some lenders are intentionally screwing up modification requests.”

Gary Andrews of Rancho Peñasquitos began negotiating for a modification last summer, after a sharp drop in income from his painting business. “We weren’t asking for a handout,” he said. “We were just looking for a mortgage we could afford.”

Andrews said CitiMortgage gave him a trial modification last October, cutting his $3,000 mortgage payment to $1,550, which added 10 years to the term of the loan. Three times over the next eight months, the bank asked for more documents to make the modification permanent. As he supplied the documents and kept paying the mortgage, he called the bank every week to see if he had been approved. “They kept saying, ‘Stop worrying. You’re a perfect candidate. We just have to finalize some things,’” he said.

But when Andrews called on about June 1, the bank told him it would no longer accept his payments and asked him to call back in two or three weeks. When he called back on June 16, he was told that he had been removed from the HAMP program as of May 26 and that his home would be foreclosed upon in eight days. After Andrews pleaded against the foreclosure, he was told that if he submitted new financial statements, he might be readmitted to the HAMP program.

Andrews spent the 48 hours compiling and resending yet another copy of his financial statements. But when he called back, he was told that his loan officer was out for a week, his financial statements had not been reviewed and his home was slated for sale in just three days. With the help of a lawyer, he staved off the foreclosure, but he has since filed for bankruptcy, hoping for some protection through the court.

Although CitiMortgage declined to comment on Andrews’ specific case, it maintains that it provides workout arrangements and other options so that, whenever possible, borrowers are able to stay in their homes.”

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