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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.