- The Washington Times - Friday, April 30, 2010

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.”

Mr. Bowers notes that many homeowners are in trouble now for doing the same thing that would have been fine, say, 10 years ago, when people got first and second trusts or an adjustable-rate mortgage to get them into the home, then easily refinanced to a fixed rate as the home’s value quickly increased.

“A lot of people played on starting out with an ARM and then refinancing, and they got hammered when they couldn’t,” he says.

Another problem may have to do with the voluntary nature of the program itself, Ms. Gordon notes.

“Our view is that at no point has the government required servicers to fix the loan,” she says. “It’s all voluntary. Servicers have some incentives, but they don’t always align with the interest of the lender.”

Meanwhile, homeowners who do get their modifications denied frequently don’t know what to do next. There is no formal appeal process, and the variety of responses also tends to gum up the system.

“It’s clear that this program is not getting ahead of the curve,” Ms. Gordon says.

In response to some of the kinks of the initial program, the government recently announced some adjustments it hopes will reduce the number of modification failures. The new Home Affordable Modification Program (HAMP) ensures that borrowers are considered for loan modifications before foreclosure and requires full verification and documentation.

“We have verified trials now from day one,” Ms. Maggiano says. “Before, we had people who were in a foreclosure situation. The new approach is designed to help those borrowers who have the best chance of recovering.”

The Treasury Department also noted that active permanent modifications are on the rise, with March numbers at 227,922, an increase of 35 percent from February. There are an additional 108,212 modifications in the pipeline awaiting borrower approval.

Even with the uptick, the numbers are considerably lower than those envisioned at the start of the program, which hoped to help some 4 million borrowers keep their homes. Some advocates warn that even the new incentives do not go far enough in addressing the issues involved and that lenders’ reluctance to reduce the principal owed dooms many homeowners.

“Right now, the math won’t work for them,” Ms. Siegel says.

Still, reducing the principal sticks in the craw of many, who point out that such a scheme would reward those who made bad decisions in the first place.

CRL’s Ms. Gordon notes that giving bankruptcy judges the power to modify and restructure loans on the principal residence would go a long way toward overcoming the backlog and streamlining the process.

“If that change is in place, it would put pressure on servicers to do those voluntary modifications,” she says. “It would give homeowners a backstop and really change the dynamic.”

So what can you do if your home loan modification application is denied?

c Resubmit your loan application. Often, a simple mistake on either end can result in denial.

“Mistakes are made every single day,” says Ms. Gordon, who notes that an independent appeals process, not yet in place, would help matters. “Servicers don’t always like admitting them.”

• Consult a HUD-accredited housing counselor. The HUD website (www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm) offers a database of accredited housing counseling agencies, organized by state.

“A HUD-accredited agency can help you get a package together,” Ms. Siegel says. “Sometimes a pair of fresh eyes can really help, even if you are a Harvard graduate.”

For those whose loans are not owned by Fannie Mae or Freddie Mac, the Hope Now Alliance (www.hopenow.com), a consortium of lenders, services and investors launched in 2007, conducts workshops around the country.

Meanwhile, the Making Home Affordable website (https://makinghomeaffordable.gov/index.html) offers clear, easy-to-navigate information and instructions for determining modification eligibility.

Close to home, a brand-new venture, the Capital Area Foreclosure Network (www.capitalareaforeclosurenetwork.org), a joint partnership of the Metropolitan Washington Council of Governments and the Nonprofit Roundtable of Greater Washington, working with the Urban Institute, provides organization support and research analysis as well as warnings about local modification scammers who promise home loan modification help - for a hefty fee.

• Beware of scammers. In other words, don’t get your home loan modification help from a lamppost sign.

“The predators are often the same people who were offering loans that got people into trouble in the first place,” Ms. Siegel says. “There’s absolutely no reason to pay for counseling services.”

• Consider a short sale.

A new government program encourages lenders to allow more troubled borrowers to sell their property for less than they owe on their mortgages. If lenders agree to a fair-market sale, borrowers can walk away from the rest of the debt, a process cheaper and faster than foreclosure. Lender incentives include $1,500 for allowing the short sale and up to $6,000 for releasing the homeowner from a second lien. The borrower, while still losing the home, will do so without the stigma of foreclosure and with up to $3,000 in pocket to help cover relocation expenses.

Short sales allow for a shorter recovery period for the former homeowner, Ms. Maggiano notes, and the government program is more straightforward and easier to navigate than the traditional short sale.

“Modification is not for everyone,” Ms. Maggiano says. “A lot of people are in homes now that they can no longer afford.”

• Be realistic. You may have reached the point of no return.

“If the homeowner tries to save the home, he’ll spiral down,” Ms. Siegel says. “Some people are so desperate to come up with a solution that they’ll try anything, including a predator who will tell them that everything is going to be all right. If it sounds too good to be true, it probably is.”

In today’s economy, there are no easy fixes.

“I’ve been in business for 30 years, and I’ve never seen anything like this,” Mr. Bowers says. “I was brought up to say, ‘I did it, I made a mistake,’ ” he adds. “Now, nobody is saying that, not the borrowers, not the banks, not the politicians. But there’s certainly enough blame to go around.”

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