Cover story: Borrower relief uneven, not easy

The numbers are startling. 43,248 foreclosure filings in Maryland alone in 2009, according to the state Department of Housing and Community Development, a 33.7 increase from 2008. Seven million households behind on their mortgage payments nationwide. Millions of homeowners underwater, owing more on their mortgages than their homes are worth.

It has been called the “50-state Katrina” that threatens to swamp the American dream of homeownership.

One facet of the solution? A mortgage modification plan that would stretch out payments, reduce interest rates and, in some cases, even cut the principal owed. But the federal government’s loan modification program is facing some discomfiting statistics of its own: 2,789 modifications have been canceled since the program’s start in the fall, according to the Treasury Department and the Department of Housing and Urban Development. Meanwhile, many homeowners in trouble with their mortgages complain they are not getting the help they need to stand against the storm.

“Things are just not moving very quickly,” says Julia Gordon, senior policy counsel at the Center for Responsible Lending, a policy and research organization dedicated to making lending practices more transparent. “For many people, the other shoe is about to drop.”

More than 1 million people in what are called trial modifications are not making it to permanent modification status, Ms. Gordon says.

Lenders point to problems of their own: borrowers who lack the required documentation, miss payments or don’t show up for appointments.

“There is validity on both sides,” says Marian Siegel, executive director of Housing Counseling Services, a HUD-certified counseling agency established in 1972. “Lenders have been less than responsive and delayed final approval for a number of reasons. Homeowners in trouble are not always providing every piece of paper necessary to move the process forward.”

Why do home loan modifications fail? The answers have a lot to do with the conditions that caused the mortgage crisis in the first place: too many borrowers with little documentation of actual income and deals made with little or no money down. Flip the coin, and you will find too many lenders whose interests may lie with hidden investors, hedge funds or other entities intent on making a profit at all costs.

Initially, the government was so focused on helping homeowners stave off foreclosure that troubled borrowers were accepted into the three-month trial modification program without verification of income or consideration of the homeowners’ long-term ability to make payments.

“It allowed for a lot of people to get into the trial program who would not be eligible to convert to a permanent loan modification because they didn’t have sufficient income,” says Laura Maggiano, director of policy for the Office of Homeownership Preservation of the U.S. Treasury.

Other reasons for denial might include other kinds of debt that can get in the way of repayment. And homeowners who are in trial modifications often are still confronted with foreclosure notices and end up leaving their homes, making them ineligible for permanent modification.

Recently, housing counselors report still another significant factor: loss of income.

“It’s not just the subprime loans that are the problem anymore,” says Fred Bowers, vice president of Fairfax-based Intercoastal Mortgage LLC, which is affiliated with Van Metre Homes. “It’s people having lost jobs or with a severe reduction in income.”

And that doesn’t even address the effect of having a $225,000 mortgage on your home when an identical home down the block just sold for $90,000. It’s enough to make some homeowners simply walk away.

“Sometimes it doesn’t make sense for people to stay in the house,” Mr. Bowers says. “They’ll be underwater for the rest of their lives.”

Story Continues →