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.”

Executives of two of the nation’s largest banks, Chase and Bank of America, testified in Congress this morning that as many as 85 percent of delinquent mortgages are failing the Administration’s loan modification process because homeowners haven’t made trial payments or have failed to supply the necessary documentation to support their claims.

In the case of Chase, as few as two percent of eligible homeowners have received permanent reductions in their mortgage payments to help them stave off foreclosure.

“We are now working very hard to convert homeowners to permanent HAMP modifications, but we are facing challenges with borrowers completing documentation or making trial plan payments as agreed,” said Molly Sheehan Senior Vice President for Housing Policy, JPMorgan Chase. Chase has offer to modify 199,033 loans, 16,131 are approved for permanent modifications but only 4302, or two percent, have been permanently modified

Of every 100 Chase borrowers accepted for the program, only 15 will receive lowered monthly payments. 29 borrowers did not make all required payments under their trial plan, 20 borrowers did not submit all documents required for underwriting; 31 customers submitted all required documents but the documents do not meet HAMP underwriting standards which could be due to missing signatures or documents that are not current under the HAMP rules; and 20 borrowers completed all required documents and are eligible for underwriting.

Of the 20 borrowers who made all payments and correctly supplied documentation, four borrowers have been or likely will be denied a permanent HAMP loan modification, but may be qualified for other modification programs through Chase or the GSEs; 16 borrowers are or likely will be approved for a HAMP modification; and of those 16, 15 have or will likely receive a payment reduction, she said.

Documentation required for the program may include household income from several people, tax returns or tax transcripts from the IRS, credit reports, property valuations, divorce decrees, death certificates, and overtime or bonus information from employers.

Jack Shackett, credit loss mitigation strategies executive for Bank of America, said that 50,000 of the 65,000 Bank of America customers in the program have failed to provide documentation. The 15,000 who supplied correct documentation are experiencing a good conversion rate.

Shackett urged the government to find a way to accommodate borrowers who have their applications in by the program’s December 31 deadline but who have not yet signed the final modification document or who are still responding to questions about their applications.

“While there have been stories of servicers making it difficult for borrowers to submit the necessary documentation, one has to consider the flip side of the argument. Borrowers may claim servicers are making it difficult to obtain documentation when, in fact, they may just simply be hoping that the permanent modification will be approved without full documentation,” said Anthony Sanders, professor of real estate finance
at George Mason University.

An explosion of foreclosures will result from option ARMs set to reset to higher payments.

NEW YORK (CNNMoney.com) — Option-ARMs: File under, “It sounded good at the time.”

These exotic mortgages allowed homebuyers to come to closing with little cash and choose, monthly, how much to pay: interest and principal, interest only, or a minimum amount less than the interest due.

Of course, the last option is the one 93% of option-ARM buyers selected, according to a new report released this week by Standard & Poors.

But eventually, everyone has to pay the piper.

Nearly all of the 350,000 option-ARM borrowers owe more than when they first bought their homes thanks to the unpaid interest accumulating. And many loans written during the first big wave, which started in 2004, are getting ready for their five-year reset, when they become standard amortizing loans. Additionally, some newer loans will reset early if the accumulated interest has pushed the loan-to-value ratio above 110% to 125%.

That means borrowers are about to start paying very hefty prices for their homes. In one scenario outlined in the S&P report, the payment on a $400,000 mortgage jumps from $1,287 to $2,593.
25% default rate

But that doesn’t just spell bad news for borrowers. Some industry pessimists say the looming default problem could have the power to derail the nascent housing market recovery. “The crux of the matter is that as soon as these mortgages recast, the history is that they will default,” said Brian Grow, one of the S&P report’s coauthors.

And the newer the loans, the worse they will perform, the report said. The last year that any option-ARMs were issued was 2007. In the first 20 months after issuance, this vintage of option-ARMs had an average default rate of just over 22%.

That includes all option-ARMs issued in 2007. But if you calculate default rates for only 2007 option-ARM borrowers who are now underwater, the default rate jumps to 25% after just 20 months, according to S&P.

So, while there may not be an awful lot of these loans out there, their high default rates will have an outsized influence on housing markets, adding to already bloated foreclosure inventories and driving prices down further.
Bubble markets

And the markets where they’ll produce the most foreclosures are still among the most vulnerable in the nation.

Option ARMs were most popular in bubble markets — California, Nevada, Florida and Arizona — where double digit home annual price increases put the cost of buying a home out of reach.

In fact, 60% of these loans went to residents of California and other Western states, places where prices have fallen the most, according to report coauthor Diane Westerback. “The geography is negative for these products,” she said.

Many borrowers in these places could only afford a home if they chose the option ARM. Many counted on continued hot market conditions to add value to their homes. The extra equity could then be tapped to pay their bills.

We all know how that worked out.

Home prices in many of the markets where option ARMs are most concentrated have fallen 30%, 40% or more. When the loans recast, most borrowers will find themselves severely underwater.

“Because borrowers of [options ARMs] are in a much worse position,” said Westerback. “You’ll see defaults rising very rapidly.”

And most option ARM borrowers will not be good candidates for refinancing or mortgage modifications because their loan-to-value ratios will be far too high. Under the administration’s Making Home Affordable program, for example, mortgages with balances that exceed 125% of the home’s value are not eligible for help.
Not so white lies

There is another little problem that many option-ARM borrowers seeking refinancing would face: “Upwards of 80% of were stated-income loans,” said Westerback.

These are the so-called “liar loans” in which lenders did not verify that borrowers earned as much money as they said they did. Lenders may not be able to modify mortgages because many of the borrowers’ income could not stand up to the scrutiny. Borrowers may also not want to go through underwriting again because they could be held legally liable for deliberate inaccuracies on their original applications.

Add to those conditions the still fragile economy and high unemployment rates, and you have a recipe for disaster. To top of page

Q: I went under contract to buy a house six months ago. This is a short sale, and I understand that multiple lenders are involved. But I have been more than patient. What can I do?

I can’t seem to get anyone to listen to me. Don’t the banks want this to work out?

A: I’m sure that someone besides you wants this sale to work out — the seller! The problem is that each lender has to agree to the short sale, and lenders are drowning in non-performing home loans these days.

For a short sale to proceed, a lender will require quite a bit of documentation from the seller to determine whether the short sale is legitimate and whether the seller has the ability to make up any deficiency. A lender will also want to determine whether it would get more money if the seller simply defaulted on the purchase and the lender foreclosed on the property and sold it off.

These are some of things banks consider before allowing a short sale. The problem is that they just don’t have the staff to handle the load of short sales and other requests from distressed borrowers. Each request must be evaluated to determine how big a hit the investors will take on the loan in a short sale. The lender also tries to figure out who else is losing money on the deal, such as other lenders.

For people looking to buy distressed property, it is a lot faster and easier to buy a foreclosure than a short sale because the bank has already taken back the property and wiped out the liens. In a foreclosure, the lender sues the owner for the amount owed on the loan and then can proceed to take title to the home to satisfy the debt.

Once the lender has ownership of the home, it doesn’t need to make any determination about the borrower or the borrower’s finances; its only interest is to get the most money possible from the sale. Lenders are typically extremely motivated to sell foreclosed property. The faster the bank sells the home, the less they will lose on the sale.

Unfortunately, short sales can quite commonly take six months or longer to work out. If I were you, I’d think about canceling the contract and looking for a foreclosure to buy instead.

Q: I have lived in my home more than 32 years. I signed a contract to build a new home on my lot for $400,000. It will be ready next September. I’ll move out into a rental during construction.

Do I qualify for the new $6,500 home buyer tax credit? Please let me know. I expect to close on the construction loan by December 5, 2009.

A: If you’re tearing down your existing home and building a new home on your own lot, you will not qualify for the first-time home buyer tax credit.

If you’ve purchased a lot and are building a home on that lot that won’t be completed until September 2010, you are still out of luck. You must close and move into your newly constructed home by June 30, 2010 to qualify for the trade-up tax credit.

Purchasing a lot and closing on a construction loan aren’t enough to qualify you for the tax credit. Your home won’t be habitable until after the tax credit has expired. You’d not only have to move into the home by that time but you might also have to have an occupancy permit issued by the appropriate local authorities as evidence that the home was complete on a certain date.

For more details or go to the IRS Web site, irs.gov, and search for “first-time home buyer tax credit update.”

Q: I am really angry about what’s going on with my loan modification — or I should say, my loan non-modification. I have been going back and forth with my big box lender, and first they say I can get a loan modification — and then that I can’t.

I know you’ve been encouraging people to tell their loan modification hell stories. Mine is too long to go into in an e-mail. But I want to do something to get my lender to pay attention to me. What do you recommend?

A: I’m sorry to hear that you’ve had so much trouble getting a loan modification from your lender. Perhaps it will help to know that there are hundreds of thousands of folks having the same confusing and frustrating experience as you are.

I consulted with some sources at the Treasury Department, and one of them recommended that borrowers stuck in loan modification hell should write a concise letter that clearly details what has happened to you.

Organize your thoughts into a timeline of events. And be sure to include any information you have that identifies which employee you spoke with (the employee’s identification number, office or location would be helpful), the date of the contact and even the time of the call. If you’ve received a letter or e-mails, include a copy of them with your letter.

You’ll want to address your letter to the president or chief executive officer of the bank. If you don’t know who that is, go to the Yahoo.com finance page. Under the “investing” tag, use the search box to type in the name of your lender. A bunch of company names will pop up. Choose the company you’re interested it. On the company page, choose the “profile” tab on the left navigation bar. That will take you to a page with the company headquarters and the names (and salaries) of key employees, including the CEO.
Once you have the CEOs name and address, write a letter that roughly follows this format:

Dear (name of bank president or CEO):

I am writing to tell you how confused and unhappy I am because (fill in reason why). Here is what happened:

On (fill in date), (fill in what happened, with whom you spoke with, contact information for that person and any other information.)

(Repeat until you have finished the time line.)

My question is: (fill in the questions you want to ask).

What I want you to do: (if you want the company to look into your situation, approve your loan modification, or do something else, write it here.)

I’ve attached supporting documentation, including:

I’ve copied the Treasury Department, the OCC and the FDIC on this letter.

I look forward to hearing from you or your team quickly.

Sincerely,

(Your Name)

You should then overnight the letter, or send it return receipt requested so you know that your letter was received by the company. Be sure to send a copy to the Treasury, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) so there is a record of your complaint.

According to the latest figures, some 650,000 loans have been put into temporary loan modifications under the Making Home Affordable program. Big banks say they are putting thousands of others into their own loan modifications.

Some people will slip through the cracks, or wind up on the phone with someone who isn’t trained well or isn’t knowledgeable enough to help you.

I hope that by elevating your concerns to the executive suite, your loan modification will get the attention it deserves.

Good luck. Let me know what happens.