Mortgage Modification Failures Push Borrowers Into Foreclosure

Jill Gray of Mesquite, Texas, said her three-year-old son, Anthony, often tells her before he goes to bed: “I wanna go to the other house.”

Jill, Anthony and Tiffy, their black Labrador-mix dog, moved about 12 miles to a rental home three weeks ago after their one-story brick house in Garland was auctioned in a foreclosure. Gray, 38, tried for almost a year to get her mortgage modified, only to have the approval rescinded. Bank of America Corp. said documents were missing -- papers that Gray said she sent.

Gray’s experience, in which homeowners get evicted while participating in programs designed to avert foreclosures, is being repeated thousands of times at the biggest mortgage firms, according to groups that aid borrowers. The government’s Home Affordable Modification Program came under fire at hearings last week for “trial” arrangements that allow late fees and debts to stack up and documents to disappear, triggering seizures.

“Many homeowners end up facing foreclosure solely on the basis of the arrears accumulated during a trial modification,” said Julia Gordon, senior policy counsel at the Center for Responsible Lending, in Oct. 27 Congressional testimony. “One incomplete payment or one accounting mistake can land you on an apparently unstoppable conveyor belt to eviction.”

With as many as 7 million homes facing foreclosure or already taken, according to Zillow Inc., both the government and companies such as Bank of America and JPMorgan Chase & Co., the two biggest U.S. lenders, offered programs to forestall seizures by easing mortgage terms. Changes include cutting interest rates for as long as five years and extending repayment to 40 years.

More Payments

About half the 1.4 million temporary or “trial” modifications granted since the program’s March 2009 inception have been canceled, according to U.S. Treasury Department data. Only 466,708 borrowers have received permanent modifications. About one in five of the canceled modifications is either in foreclosure or bankruptcy, according to a Treasury survey of the nation’s eight largest mortgage servicers, which handle billing, collections and foreclosures.

Even borrowers who do win approval and never miss a payment can wind up in foreclosure, the Office of the Special Inspector General for the Troubled Asset Relief Program, or SIGTARP, said in an Oct. 26 report to Congress. “They may face back payments, penalties and even late fees that suddenly become due on their ‘modified’ mortgages and that they are unable to pay, thus resulting in the very loss of their homes that HAMP is meant to prevent,” the report said.

Lost Paperwork

Mortgage firms make the problem worse by losing paperwork, according to testimony from Richard Neiman, the New York State superintendent of banks. In a May and June survey of 40 counselors representing as many as 14,000 borrowers, the California Reinvestment Coalition found 100 percent said servicers had lost or ignored documents, according to associate director Kevin Stein, whose San Francisco organization works with low-income communities.

“It’s more common to hear that banks have lost paperwork than to hear that they received it and properly handled it,” said Joe Ridout, a spokesman for Consumer Action, an education and advocacy group based in San Francisco with a network of 9,000 community organizations nationwide.

That leaves HAMP participants vulnerable to foreclosure, a process that has been tainted by allegations of “robo- signing,” in which mortgage firms signed and submitted court documents to justify home seizures without verifying they were accurate. Attorneys general in all 50 states are investigating.

Treasury Responds

HAMP modifications reduce mortgage payments to 31 percent of a homeowner’s monthly gross income. The process often results in a larger mortgage as accrued interest and other charges are tacked onto the balance. Some HAMP modifications add so-called balloon payments to the loan that are due when a house is sold or the mortgage paid off.

“The program continues to perform well,” Andrea Risotto, a Treasury spokeswoman, said in a phone interview. “The target of affordability that HAMP put in place - this idea of 31 percent debt to income -- which was far more aggressive than what was done historically, is helping homeowners sustain the modification over time.”

Tom Kelly, a JPMorgan spokesman, said the New York-based lender is able to track paperwork because it scans every document as soon as it’s received. At Ally Financial Inc., spokeswoman Gina Proia said the Detroit-based lender requires homeowners to submit paperwork at the start of the modification process, leading to a “higher likelihood” of permanent modifications and lower re-default rates. Jumana Bauwens, a Bank of America spokeswoman, declined to comment on matters tied to lost paperwork.

Processing Fees

Richard Cormier, in Rialto, California, had made eight payments on a trial modification of his mortgage when Wells Fargo & Co. told him Oct. 12 his home was being auctioned at the end of the month. The San Francisco-based bank told Cormier his file was missing documents.

“Every time I try to do something they ask, it’s never right,” said Cormier, 56.

Tom Goyda, a spokesman at Wells Fargo, the biggest U.S. mortgage lender, said yesterday the modification will be approved. As of June, the company has started to assign one employee to handle a modification from start to finish so that a homeowner “knows who they’re working with,” Goyda said.

Under HAMP guidelines, final foreclosure sales are banned until 30 days after an applicant has received a notification of rejection. A sale can’t take place until servicers provide foreclosure attorneys with written certification that all modification efforts have been exhausted.

Delayed Responses

“Our normal policy is to continue with the foreclosure process while we review a customer for a loan modification,” Bank of America’s Bauwens said in an e-mailed statement. “If we have not finished our review, we will postpone the foreclosure sale automatically.”

Some lenders take as long as nine months to approve modifications, something that should take as little as 45 minutes, said Rick Rogers, an attorney in Bannockburn, Illinois, who represents borrowers. Witnesses at last week’s hearing pointed in part to understaffing.

“Lenders are overwhelmed,” Nathalie Martin, a professor at the University of New Mexico School of Law, in an interview. “A lender is duty-bound to hire enough people to be able to service their loans.”

Falling Behind

Gray, the Texas mother, said she fell behind on her mortgage bills last year after paying for medical treatments for her son that weren’t covered by insurance. When her home was auctioned in September, there were no bidders, so it reverted to the mortgage holder, Mclean, Virginia-based Freddie Mac, taken over by the government in 2008. The house is now listed for sale at $55,000.

When Gray, a part-time Avon Products Inc. saleswoman, received the modification offer in December from Bank of America, based in Charlotte, North Carolina, she said she immediately signed and returned the contract using the supplied FedEx Corp. envelope.

Bauwens said the bank didn’t receive it by the due date. For Gray’s three subsequent applications, she said she faxed copies of pay stubs and financial statements requested by the bank. Bauwens said the bank didn’t get key documents.

Gray kept a record of her calls to the bank, in addition to printed confirmations of documents she faxed. The log reads, in part: “Sept. 9: Called, was disconnected. Called again. Spoke to Christina. While transferred to supervisor I was disconnected. Called back. Ruby answered. She referred me to their REO Dept.”

Reviewing Rejections

HAMP conducts regular reviews of servicers as part of its Second Look compliance program that includes analyzing some files of homeowners who were denied modifications, said Risotto, the Treasury spokeswoman. If loans are under a Second Look review, foreclosure sales are suspended, and if reviewers conclude that servicers aren’t following guidelines, they may require applications to be re-evaluated, she said.

Gray is again being considered for a modification and the foreclosure sale may be rescinded, Bank of America’s Bauwens said. Gray, who works in the building permit department in a city called Fate, said she doesn’t expect to be approved. Now that she’s been evicted, she has to pay $775 a month in rent -- boosting her expenses beyond the program’s guidelines.

To contact the reporters on this story: Kathleen M. Howley in Boston at kmhowley@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net; Danielle Kucera in New York at dkucera6@bloomberg.net.

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net; Rick Green in New York at rgreen18@bloomberg.net.

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