“Are mortgage lenders and investors in mortgages and mortgage securities supposed to be financially responsible for every trouble that befalls an American home borrower during the 30 years of a typical mortgage? I don’t think so. The NYT’s article below highlights a woman who became disabled and could no longer work and pay her mortgage, as a result. That’s terrible,…
…but the mortgage lender (and/or related investors) aren’t responsible. They didn’t provide a free disability insurance policy as part of the mortgage contract, nor apparently did the borrower purchase one. This is a tragedy and certainly an issue where government might step in to help (paying some portion of her contractual mortgage payments), but if government requires the mortgage lender and investor to absorb a greater loss (via a government-mandated modification that abrogates the private mortgage contract) than would occur if they obtained the property (through foreclosure or short sale) and resold it, then there are going to be fewer mortgage lenders and investors and those that remain are going to demand higher rates to compensate for being responsible for every situation that might befall a home borrower. That’s a big cost to spread to every home borrower and I think will do more harm than good.”, Mike Perry, former Chairman and CEO, IndyMac Bank
A Slack Lifeline for Drowning Homeowners
After Lucy Circe became disabled and could no longer work, she applied to Bank of America for a mortgage loan modification on her Vermont home. Over more than two years, starting in 2012, the bank repeatedly requested copies of documents that had already been provided, asked for proof that she was no longer married to a man she did not even know, and made other errors, like asking why Ms. Circe had indicated that she didn’t want to keep her property when she had actually told the bank she did.
None of it made sense. But a disturbing report on the federal government’s Home Affordable Modification Program issued on Wednesday suggests that Ms. Circe’s experience was anything but unique.
Advertised in 2009 as a lifeline for as many as four million troubled borrowers, the program was one of the Obama administration’s signature efforts to help homeowners. But the report, by Christy L. Romero, the government official with authority to monitor the program, shows that six years later, just 887,001 borrowers are participating in loan modifications — deals that reduce the costs of mortgages.
It appears that the program has allowed big banks to run roughshod over borrowers again and again.
Instead of helping some four million borrowers get loan modifications, the report noted, banks participating in the program have rejected four million borrowers’ requests for help, or 72 percent of their applications, since the process began. From the outset, Treasury’s loan modification program had problems. Among them were two design flaws: making the program voluntary for the banks and letting those banks that participated run the process on their own.
The data points in the new report are grim.
CitiMortgage, a unit of Citibank, had the worst record, rejecting 87 percent of borrowers applying for a loan modification. JPMorgan Chase was almost as bad, with a denial rate of 84 percent. Bank of America turned down 80 percent, and Wells Fargo rejected 60 percent.
The banks say they have good reasons for rejecting loan modification applicants. In 38 percent of cases, the banks blamed the borrower for either not completing the paperwork or failing to make the first payment under the program.
Mark Rodgers, a Citibank spokesman, for example, said the bank was committed to keeping borrowers in their homes. The bank has approved 100,000 loan modifications under the program, he said, representing half of the applications that were complete.
Representatives of two other banks, JPMorgan Chase and Bank of America, disputed the denial rates cited in the report. Rick Simon, a spokesman for Bank of America, said that two-thirds of the applications made under the Treasury program did not qualify, but “in the end, 83 percent of more than one million customers whose HAMP applications were reviewed by Bank of America — five out of six — avoided foreclosure through either a modification or another solution.”
But Ms. Romero, whose title is special inspector general of the Troubled Asset Relief Program, said the high rejection rates her office found pointed to problems at the banks, not with borrowers.
“We’ve always known that a lot of people were being denied for loan modifications,” Ms. Romero said. “When we started looking at these numbers — 80 percent or more at the larger servicers — it’s so telling that something is not right in these operations.”
As the report noted, Treasury has a responsibility to ensure that the banks involved in the program are not wrongfully rejecting homeowners for a modification. But that’s not happening, Ms. Romero said.
“We are constantly seeing problems with the way servicers are treating homeowners and not following the rules,” Ms. Romero said in an interview on Wednesday. “I don’t understand why there hasn’t been a stronger policing from Treasury on servicers.”
In response to the report, Mark McArdle, chief of Treasury’s Homeownership Preservation Office, said the agency had “robust compliance procedures” to test whether banks were improperly denying loan modification applicants. That process, he said, indicates that improper rejections are uncommon. In a statement, he added, “Since 2011, we have seen significant improvement in servicers’ compliance with program guidelines, including proper evaluation and denial decisions.”
Ms. Romero doesn’t buy the notion that improper rejections are rare. And neither do legal aid lawyers representing troubled borrowers. On the front lines in the foreclosure process, the lawyers say they’ve seen all manner of bad behavior from the banks on loan modifications.
“Virtually never does one get a loan-mod application properly evaluated the first time,” said Jacob Inwald, director of foreclosure prevention at Legal Services NYC, which provides legal representation to troubled borrowers. “We deal with these issues every single day. It requires constant pushback and challenging wrongful denials.”
He said he was swamped with such cases. It took him about two minutes to locate and send me court documents showing the abusive tactics seven borrowers in New York recently faced trying to get a loan modification under the Treasury program. He says these cases are just a small sample demonstrating that the banks are not complying with the rules.
It is never wise to exclude incompetence as a reason for the trouble that borrowers may be having with loan modifications. But Mr. Inwald said there could be a financial motivation as well. Delaying a borrower’s loan modification request can be profitable for a bank; extra time for the bank means more interest and fees can be charged to the borrower, increasing the amount owed on the mortgage.
In a case last year involving America’s Servicing Company, a unit of Wells Fargo, the bank improperly denied a borrower’s loan modification request four times over almost two years, adding $40,000 to the amount he owed, New York State court documents show.
At one point, the bank claimed that the borrower did not live in the home that was facing foreclosure, which was untrue. At another, it incorrectly calculated the borrower’s income and denied the loan modification.
The bank’s conduct “evinces a disregard for the settlement negotiation process that delayed and prevented any possible resolution of the action and, among other consequences, substantially increased the balance owed” by the borrower, the appellate court ruled. It barred the bank from recovering the $40,000 incurred during the protracted modification process.
Tom Goyda, a Wells Fargo spokesman, said the New York court case “does not reflect the experience of the vast majority of the Wells Fargo customers who remain in their homes today as the result of a mortgage modification.”
Ms. Circe’s efforts to modify her loan took a number of twists and turns. A year after she applied for the modification, in October 2013, Bank of America denied her application, saying “all borrowers are unemployed,” even though Ms. Circe’s Social Security disability insurance and rental income on the house were more than enough to support a modified payment.
Jessica Radbord, her lawyer at Vermont Legal Aid in Burlington, kept battling on her behalf.
Finally, in April, Bank of America agreed to modify Ms. Circe’s loan.
“It’s kind of stunning when they come back with all these strange reasons for denials,” Ms. Radbord said. “What really bothers me is, how on earth would a homeowner be able do this on their own?”
Homeowners wouldn’t be, and the government isn’t helping them much. That goes a long way toward explaining how a program intended to help four million troubled borrowers instead gave them the boot.
A version of this article appears in print on August 2, 2015, on page BU1 of the New York edition with the headline: Slack Lifeline for Drowning Homeowners.