Markets & Finance

Mortgage Modifications Aren't Stopping Foreclosures


Jill Gray of Mesquite, Tex., says her 3-year-old son, Anthony, often tells her before he goes to bed: "I wanna go to the other house." Last month Gray, Anthony, and Tiffy, their black Labrador mix, moved about 12 miles to a rental 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. Bank of America (BAC) initially agreed, only to rescind approval, telling Gray that documents were missing—documents that Gray says she sent.

Gray's experience of being evicted while participating in a program 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 (HAMP) came under fire at hearings late last month for granting homeowners "trial modifications" during which late fees and debts can stack up and documents can disappear, triggering foreclosures.

"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 congressional testimony on Oct. 27. "One incomplete payment or one accounting mistake can land you on an apparently unstoppable conveyor belt to eviction."

Dubious Results

With as many as 7 million homes facing foreclosure or already taken, according to real estate website Zillow, both the government and companies such as Bank of America and JPMorgan Chase (JPM), 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. About half the 1.4 million temporary or trial modifications granted since the program's March 2009 inception have been canceled, according to Treasury Dept. 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 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," according to the report.

Mortgage firms make the problem worse by losing paperwork, according to testimony from Richard H. 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 that all of them 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," says Joseph Ridout, a spokesman for Consumer Action, a San Francisco education and advocacy group 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 sign and submit court documents to justify home seizures without verifying they were accurate. Attorneys general in all 50 states are investigating.

HAMP Modifications

Under HAMP, homeowners have their mortgage payments reduced to 31 percent of their monthly gross income. The process often results in them owing more money because accrued interest and other charges are tacked onto the mortgage balance. Some HAMP modifications add so-called balloon payments to the loan that are due when a house is sold or the loan paid off. "The program continues to perform well," says Andrea Risotto, a Treasury spokeswoman. "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."

Spokesman Tom Kelly says JPMorgan is able to track paperwork because it scans every document as soon as it's received. At Ally Financial, spokeswoman Gina Proia says the 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.

Gray, the former homeowner in Texas, says she fell behind on her mortgage bills last year after paying for medical treatments for her son that weren't covered by insurance. She says she received the modification offer from Bank of America in December and immediately signed and returned the contract, using the supplied FedEx (FDX) envelope. Bauwens said the bank didn't receive it by the due date. Gray kept a record of her calls to the bank and 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." When her home was auctioned in September, there were no bidders, so it reverted to the mortgage holder, Freddie Mac (FMCC), which was taken over by the government in 2008. The house is now listed for sale at $55,000.

Gray is again being considered for a modification, and the foreclosure sale may be rescinded, Bank of America's Bauwens says. Gray, who works in the building-permit department in a city called Fate and is a part-time Avon Products (AVP) saleswoman, says she doesn't expect to be approved. She's paying $775 a month in rent, boosting her monthly outlays beyond the program's guidelines on income and expenses.

The bottom line: Programs meant to prevent foreclosures don't work for many homeowners who participate, in part because of paperwork errors.

Kucera is a reporter for Bloomberg News.
Howley is a reporter for Bloomberg News in Boston.

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