Ever wonder why it was so difficult for people to get permanent loan modifications a couple of years ago? Maybe it’s because some employees were allegedly paid to make sure they were denied, at least at one bank.

According to a June 14 Bloomberg.com article, Bank of America provided employees with incentives including cash bonuses and gift cards for meeting quotas linked to sending homes into foreclosure. The allegations were revealed by past employees as part of a lawsuit filed against the banking giant earlier this month by homeowners who were denied modifications. Many who were denied loan modifications eventually lost their homes to foreclosure.

Apparently employees in the loss mitigation department were instructed to delay review, ask homeowners for items they already had in the file, and do whatever was necessary to deny permanent loan modifications. Former B of A loan servicing specialist Theresa Terrlonge said that they received restaurant gift cards and cash rewards for denying loan modifications. “I witnessed employees and managers falsify information in the systems of record, and remove documents from the homeowners’ files to make the account appear ineligible for loan modification,” said Terrelonge.

But the big rewards came for actually pushing a borrower into foreclosure. According to Simone Gordon, a loss-mitigation representative who left the company in 2012, specialists who put 10 borrowers into foreclosure, including those in a trial modification, received a $500 bonus. Bank of America insists that the allegations are inaccurate and will file an opposition to the motion to make this a class action case.

Unfortunately, I’m not terribly surprised by these allegations and find it difficult to believe that B of A was the only bank involved in this type of behavior. It’s no wonder that there have been so few successful loan modifications; the very people charged with creating positive outcomes were apparently paid to do otherwise.

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It was just announced that the Obama Administration is making some significant changes to the Home Affordable Modification Program (HAMP). I noted 3 key points:

1. Homeowners who are struggling financially will be eligible for a 2nd evaluation with a less stringent debt-to-income ratio.
2. The program will be extended to include investor owned properties that are used as rentals.

And ….(drum roll)…

3. The  Administration will triple incentives for lenders who write down principal balances for underwater homeowners, AND they are extending this principal reduction incentive to Fannie Mae and Freddie Mac!

It’s this last item that has me excited as I’ve been a proponent of principal reduction for a long time, as noted in my blog post back in 2010. What impact all of this will have of course depends on how quickly the new rules can be put into effect and how well all participating lenders adhere to the new guidelines.

All that being said, I’ll take any good loan modification news that we can get!

What is a Loan Modification?

Watch this short video to learn the truth about mortgage loan modifications.

For those of us in the industry, it hardly comes as any surprise that Bank of America has failed to help thousands of Americans receive a permanent loan modification through the Home Affordable Modification Program (HAMP).  And it now looks like they might have some explaining to do:  A judge has denied the bank’s request to dismiss a case involving tens of thousands of homeowners who claim they were refused help through the HAMP program.

As you remember, HAMP uses federal funds to help struggling homeowners.   Under the program, Bank of America is required to provide foreclosure alternatives and permanent loan modifications to eligible homeowners.

However, according to Steve Berman, managing partner of Hagens Berman, the firm representing the homeowners. Bank of America has refused to permanently modify the loans of thousands of borrowers, even after successfully completing a Trial Period Plan (TPP).  “The vast majority tell us the same thing: Bank of America claims to have lost their paperwork, failed to return phone calls, made false claims about the status of their loan and even taken actions toward foreclosure without informing homeowners of their options,”  said Berman.

In the lawsuit, Berman seeks to prove that Bank of America “intentionally postpones homeowners’ requests to modify mortgages, depriving borrowers of federal bailout funds that could save them from foreclosure.”

“The bank ends up reaping the financial benefits provided by taxpayer dollars financing TARP-funds and also collects higher fees and interest rates associated with stressed home loans,” Berman added.

The case will be limited to homeowners who entered a TPP, but were denied a permanent modification.  Judge Rya Zobel also ruled that homeowners in nine state, including California could pursue claims in their states where consumer protection laws are stronger. 

So if you’re a homeowner in the middle of trying to get a HAMPmodification form B of A, the outlook is not encouraging.  The federal government has cut-off HAMPfunds to Bank of America until they make improvements in how they administer the program, which could mean more foreclosures and short sales on the horizon for Bank of America borrowers.

During a town hall meeting last Thursday inWashington,D.C. the President took a comment from a woman in the audience who explained that her loan modification expires in January, 2012.   Despite having excellent credit, she can’t refinance because she owes more than the house is worth.  Without a new loan mod, or principal reduction she will not be able to make her payments and could lose her home.

The President agreed that the banks need to take a more aggressive role in protecting homeowners.  He commented to the banks, “We were there for you when you got in trouble, then you’ve got to be there for the American people when they’re having a tough time.”  (I think he just forgot to add the part about the banks creating this problem in the first place.)

“We want to see if we can get longer-term loan modifications. And in some cases, principle reduction, which will be good for the person who owns the home, but it’ll also be good for the banks over the long term,” President Obama said.  “You know what,” Obama continued, “speaking to the banks…you’re going to be better off if somebody’s still paying on their mortgage than if they get foreclosed on and you end up not only having to go through all those legal processes, but you also end up…selling the home at a fire sale price.”

Excuse me, but isn’t that stating the obvious?  Is there anything new here?  Under the current government Home Affordable Modification Program (HAMP), borrowers may receive a modification that is valid for 5 years, and under some non-HAMP programs the modification period is as short as 2 years.  But then what?  Like the woman in the town hall meeting who was fortunate enough to even get a loan mod, what happens when it expires? 

President Obama concluded by adding that his administration is working with banks to expand loan modifications.  “We’re going to be talking to the banks. And I mean, on a regular basis,” he said.

Well, I bet that has the banks shaking in their boots!  “Talking on a regular basis”, what does that mean and how is that going to change anything?  If we are ever going to see an end to the real estate depression that continues to drag down our economy we need an effective plan, not lip-service.  Someone needs to lean on the banks to make permanent, meaningful modifications that include (as I’ve been saying for over a year), principal reduction.  Come on Mr. President….you’ve shown you’ve got the muscle.  Let’s see some action!

First and foremost, don’t ignore the problem.   Chances are you won’t win the lottery, and your financial troubles are real.  As soon as you are 30 days late on your payment, the lender’s clock starts ticking.  There is help and you have several options.  Take a deep breath and try to look at the situation objectively.  Pick up the phone and talk to your lender.  Just remember that time is of the essence.  Acting early allows you to make the decision that is best for you.  Wait too long and your choices disappear.

Do Nothing.  It is likely the lender(s) will foreclose.  Foreclosure information will stay on your credit report for up to 7 years and may make it difficult to buy again for at least 3-5 years.

Refinance.  This is only a viable option if there is equity in your home.

Reinstatement.  This option means that you will have to pay all delinquent amounts due plus interest, attorney fees, late fees, and taxes and insurance if impounded.  If withdrawing funds from a retirement account you should consult a tax advisor.  If borrowing from friends or family make sure that all terms are in writing and that you can afford the re-payment plan. 

Loan Modification.  A loan modification re-writes your existing loan to make the monthly payments more manageable by reducing the interest rate, extending the term, and/or reducing the principal amount owed.  Your lender may participate in the government’s Home Affordable Modification Program (HAMP), which provides incentives for lenders to modify loans.  This program and loan modifications in general have limited success.  Please read my blog post dated 10/27/2010. 

Forbearance.  In a forbearance agreement your lender arranges a repayment plan that spreads out the defaulted amounts due over an extended period of time.  It may include temporary payment reductions.  You will need to supply information that shows your financial problems are temporary and you will be able to meet the repayment requirements.

Deed in Lieu of Foreclosure.   You voluntarily sign the deed back to the bank and vacate the home instead of the bank foreclosing.  Slightly better on your credit report than a foreclosure.

Bankruptcy.  Consult a bankruptcy attorney.  Filing Chapter 7 for liquidation of debt may stall foreclosure, but your lender may be allowed to resume proceedings.  Chapter 13 may halt foreclosure, but the debt of the past due amounts will be included in a 3-5 year re-payment plan. 

Short Sale.   If your home has equity, you may sell the home without lender approval.  Lacking equity, you can opt to sell the home for less than the amount owed.  This is negotiated with your lender by a qualified Real Estate Professional.  In a short sale the lender must agree to accept less than the amount of the debt owed.  This option is more favorably reported on your credit report. 

Other alternatives.  You might want to consider renting a room in your home, or getting a second job.  If you own a small business, you might qualify for an interest-free America’s Recovery Capital (ARC) loan of up to $35,000 from the Small Business Administration.  Also, if there are discrepancies in your loan documents or foreclosure paperwork, you may be able to sue your lender.  To pursue this option, consult an attorney specializing in forensic real estate work.

The most important thing you can do is not bury your head in the sand.  When a homeowner calls and tells me their home is going to auction in 5 days, there is little that can be done.  Be realistic about your financial situation.  Put it all down on paper and know exactly what you can afford today and your anticipated income over the next year.  By taking control of the situation versus letting your lender direct the action, I guarantee you will have a less stressful, healthier outcome.

Please call for a confidential, no-obligation consultation if you’d like to discuss any of these options and how they might work for  you.  To reach me quickly please call my cell phone:  619-846-9249 .  Or, leave a reply and let me know how to reach you.

According to numbers released on Monday by the Treasury Department, the Home Affordable Modification Program (HAMP) continues to be an ineffective tool for homeowners.  Loan servicers completed just 28,000 modifications during September, down 16% from August.

The goal of the program was to help 3-4 million borrowers keep their homes by modifying their existing loan to an affordable level.  To date, 1,369,414 modifications have been initiated through the program, but there are only 466,708 active permanent modifications.  Through September, 699,924 trial modifications and 21,190 permanent modifications have been canceled.  That’s a failure rate of over 50%, certainly not a good track record for any program.

So why has this program failed so miserably?  According to Edward Pinto, a prominent housing consultant who recently testified before the House Oversight Committee, HAMP requirements are so confusing that servicers have difficulty complying.  In his words, “There are only two words to describe HAMP’s guidelines:  Numbing complexity.”

So from the banks perspective, the program is difficult to implement and lacks financial incentives, but what do the people most affected think? I asked several clients who tried to get loan modifications about their experience and they cited many problems with the program: 

  • The interaction with lenders was very frustrating.  They were never able to actually speak with anyone who was making a decision about their loan and could only speak with a customer service representative who had limited information and was often from an outsourced international location.
  • They were required to fax reams of documentation, over and over as it apparently was lost and never made it into their file.
  • The time period for review was way too long.  Several clients were in forbearance agreements during the process, couldn’t afford to continue to make the payments and simply gave up.
  • Even after modification, the payments were still too high.  For many borrowers going from an interest only loan to a fixed rate, their payments were actually higher after the modification.
  • The issue of value is not addressed.  Even with modification, paying on negative equity is a difficult pill for many borrowers to swallow.

My prediction?  There will be fewer borrowers even attempting a loan modification and an increase in short sales as more underwater homeowners seek a viable solution.