WASHINGTON (MarketWatch) — Question: I have also made trial payments under the Making Home Affordable program. But my house truly was in foreclosure and I spoke with an attorney. Your advice in your column is wrong. They can foreclose, they will foreclose, and they are foreclosing on thousands of people who have made their trial payments every month! See previous Realty Q&A.

There is nothing written into this program that provides any penalty for lenders if they do not modify a loan. They very clearly state that you are not actually approved for the program, and stipulate that the magical approval (or denial) will happen at some unspecified future time.
Mortgage fix elusive for many

Recent evidence suggests housing is rebounding, but many mortgage holders who face financial problems because of the recession have a tough climb to modify their loans and keep their homes out of foreclosure. (Dec. 16)

My story is not unique. I was able to stop foreclosure (only days before the trustee sale) temporarily by filing a complaint with my state attorney general. However, I still have not received a permanent modification and my lender continues to claim paperwork that I have provided is missing.

The bottom line is that paying trial payments in anticipation of a modification does not guarantee anything and foreclosure is the most likely outcome.

Answer: I only report what I am told, which is that a trial modification under the Making Home Affordable program is supposed to suspend foreclosure and credit reporting activities by the lender.

“The program is designed to give borrowers needed relief while the lender reviews eligibility for final approval,” says David Bartels of US Home Loan Advocates, a Thousands Oaks, Calif., firm which works with lenders on behalf of borrowers solely on a contingency basis, with no upfront fees. “If you were in a trial modification and making your trial payments on time, foreclosure activity should not have occurred.”


Bartels and others on the firing line every day understand your frustration, especially when it comes to so-called “lost” paperwork — forms and verifications supplied by you and thousands of borrowers have mysteriously disappeared.

“Unfortunately, lost paperwork has become routine for the lenders as they struggle to keep up with millions of pages of documents,” he said.

As a result, collections activities of all kinds often continue, even as a loss-mitigation solution is pending. But this is the case not because the bank wants to keep you hanging until it can ultimately foreclose, but rather because papers are misplaced, sent to the wrong person or mistakenly tossed into the circular file.

Like some others, Bartels complains that the way the Making Home Affordable program is set up, with the government “compensating” lenders for up to 95% of their losses on foreclosed homes, makes it more profitable in many cases for lenders to foreclose as opposed to modify. And that, he believes, accounts for a large percentage of people being turned down when they ask to have their mortgages reworked.

However, the loan-mod expert maintains that once you have been preapproved for a Making Home Affordable modification any collection or foreclosure activity should cease and should not resume until and unless you default on the trial payments or the lender determines you are not eligible for a permanent modification.

Q: I hope you can help me. I have been trying to get my loan modified. My mortgage was originally held by a Seattle savings and loan, but it was sold to a bank which has now apparently sold it to another bank. I have provided all of the information requested each time; yet, in the last correspondence from Bank A just before the transfer to Bank B, I was told I didn’t qualify because my income was too low, my credit score was not good enough (duh), and that I had too much equity in my home.

I asked the bank how much I would need to make and asked that they recognize that I lost my job, which hurt my credit when I couldn’t pay my bills, including my mortgage. I also asked on what basis they valued my house since no one has appraised it in a long time. There was no answer.

Now, Bank B is in the picture and a local attorney working on its behalf has informed me that they are proceeding with the foreclosure. I have been in my home for over 27 years, have two nine-year old girls and my in-laws living with me and had perfect credit until I became unemployed. I used all my resources to carry the mortgage as long as I could, including my 401(k).

I have a new job and hopefully it will provide a reasonable income on which to base a modification, but the bank won’t provide guidelines and we just live in fear without being able to know how to satisfy them. What should I do?

A: I know you are frustrated. Everyone is. But the key to your situation appears mainly to be that you have too much equity in your property. Aside from the fact that your income may not be enough to afford even a modified payment, or your credit score is such that you won’t qualify, the real crux of the matter seems to be that foreclosing would not result in a loss to the lender, so the better option — for the lender, at least — is simply to foreclose and be done with you.

I base my assumption on the fact that you have been paying on your home for nearly 30 years, so you probably have built up tons of equity. That may not be the case if you refinanced to the hilt within the last four or five years or so. But based on what you wrote, I just don’t know about that.

My advice now is to try to refinance the property, which may be a long shot. You just started a new job, which may work against you unless it is in the same field your were working in before you lost your job. Your lousy credit score is a negative, too, and you may not make enough to support a loan large enough to pay off the your current mortgage.

But unless you qualify for a loan mod, which doesn’t seem to be the case, your only other choices are to sell and move before you are kicked out or refinance.

Banks and other lenders are still foreclosing on Americans’ homes at a rate that’s outpacing the Obama administration’s main effort to stem the crisis.

In fact, while the Treasury Department’s Home Affordable Modification Program, or HAMP, has started the mortgage modification process on almost 760,000 homeowners who are at risk of losing their homes, less than 5 percent of those workouts have become permanent, government data show.

“HAMP has made only limited progress for nine months now, and the residential foreclosure crisis continues to mount,” said Richard Neiman, the superintendent of banks in New York state and a member of the Congressional Oversight Panel that was formed to monitor the Treasury bank bailout funds that support the mortgage program. He was appointed to the post by the Democratic leadership in the House of Representatives.

Another member of the oversight panel, U.S. Rep. Jeb Hensarling, a Texas Republican and a critic of the bailout bill, called the mortgage program “a failure.”

In a recent report, he said the administration’s efforts “have assisted only a small number of homeowners while drawing billions of involuntary taxpayer dollars into a black hole.” (Hensarling recently left the panel.)

The Treasury Department acknowledges that its program needs to do a better job of making hundreds of thousands of trial modifications permanent, but an official said the program is making progress and is on track to meet many of its goals.

“I think that if you go back and look at what we said we would do in February, we are on track to meet the president’s goals,” said Michael Barr, an assistant Treasury secretary who helps oversee the nation’s main modification program. “We are not going to be able to prevent every foreclosure in the country.”

More than 5 million mortgages have been caught in foreclosure proceedings since the economy began slipping in 2007, and an estimated 8 million to 13 million more could follow in the next five years. The Treasury’s goal is to help modify 3 million to 4 million mortgages in three years, but only about 1 percent of that number have completed the process.

The Treasury program could spend as much as $75 billion helping homeowners avoid foreclosure. The program seeks to pay three parties – the company that services a loan, the bank or investor that owns the loan and the homeowner – if they rearrange the mortgage so the homeowner’s monthly payment is more manageable.

One of the central problems, the administration and its critics agree, is the slow pace of finalizing the modifications it’s started.

Under the program, mortgage servicers – companies that collect monthly mortgage checks and pay the bank, property tax and insurance – arrange the modifications.

Through November, the Treasury Department said that more than 3 million homeowners had been sent information on potential modifications, and that 1 million of them had been offered modifications.

Of those, 759,058 trial modifications have been started – but just 31,382 have been finalized into what Treasury calls “permanent modifications.”

Part of that low conversion rate is to be expected because a modification’s trial period is three months long. If a homeowner remains current on his or her payments and provides all the necessary documents, then the modification can become permanent. A trial modification that started in October, for example, wouldn’t become permanent until January.

However, the conversion rate is low even for trial modifications that have been under way for more than three months.

As of Oct. 31, only 4.7 percent of the modifications that had been on the books for at least three months had become permanent, according to the Congressional Oversight Panel.

While that doesn’t mean that more than 95 percent of trial modifications begun three months or more earlier “are failures,” in the panel’s words, it does mean that the “vast majority” of trial modifications failed to convert on the schedule that the Treasury originally announced.

Treasury’s Barr said that mortgage servicers – some them stand-alone companies, others units of big Wall Street banks – simply aren’t doing enough to move homeowners from trial to permanent modifications.

While most homeowners are making their payments once they’re in a trial modification and the basic structure of the program is working, more needs to be done to push mortgage servicers to close deals, he said.

“It sounds really boring, but it is basic execution on the ground,” Barr said. “They started to ramp up in the spring, and they have not done a good enough job to get the documents in that need to come in.”

In part, that’s because mortgage service companies generally haven’t been set up to execute wide-scale mortgage modifications. Mortgage servicers historically have been highly automated – more akin to collection agents than to loan officers, and they’ve needed to change their business model, hire staff and rethink how they interact with customers, a process that’s been slow.

“The servicers need to do a better job,” said Tom Miller, the attorney general of Iowa and a leader in state-level efforts to help desperate homeowners. “They have to make sure they have the full staff, make sure they are trained, make sure they don’t make people wait and wait and wait. We have a tendency to accept the wait, and we shouldn’t.”

Faith Schwartz, the executive director of an industry foreclosure-prevention group called the Hope Now Alliance, said mortgage servicers have made a “huge investment in staffing and technology,” and that much of the past year has been spent learning and adapting to the Treasury’s new program.

“My impression is everything that gets done from here on is going to be much better than what was done a year ago,” she said. In a few months, she said, many of the modification statistics will better reflect that.

Miller also said that mortgage companies need to reduce the principal on some of their loans in order to prevent more foreclosures. That could mean, for example, reducing the balance owed on a $200,000 home to, say, $180,000 if the home’s value has dropped substantially. That, he said, was one of the tricks that helped his state emerge from a severe farm crisis two decades ago.

“We saw this movie before in Iowa in the 1980s, and modifications are what saved rural Iowa,” he said. “Many of them were premised on reduced principal.”

In the third quarter of 2009, nearly a quarter of single-family homeowners with mortgages owed more than their homes were worth, the Congressional Oversight Panel said. The Treasury’s program does little to reduce mortgage principals, the panel said, adding that “as currently structured,” the Treasury program “appears capable of preventing only a fraction of foreclosures.”