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Help slow to arrive for troubled homeowners

After over a year of various industry initiatives, the slow pace of rewriting unaffordable loans remains at a crawl, threatening a fragile recovery. By's John W Schoen.

For the past 16 months, Courtney Scott has been trying to get her lender, Bank of America, to modify the mortgage on her Atlanta-area home. She’s sent dozens of letters and e-mails to state and federal officials, bank representatives and mortgage assistance groups like HOPE Now.

For a time, she said, she got little response. Lately, she’s been getting at least a call a week from different Bank of America representatives. Lots of calls, but little progress discussing a new loan.

“Two months ago they said, ‘Well, you’re too far behind for us to help you: You need to make a few payments,'” she said. “So I had my brother send me some money and made three payments. Then they said, ‘You’re not far enough behind for us to help you.'"

Scott is not alone. After more than a year of government and industry initiatives, capped by the Obama administration’s $50 billion Making Home Affordable program, the pace of rewriting unaffordable loans is still at a crawl.

“At best we’ve been treading water,” said Alan White, a law professor at Valparaiso University, who tracks mortgage modifications. “And the number of new (foreclosure) filings is not going down — it’s pretty much steady at about (250,000) a month. So we’re behind the curve.”

According to government data released Wednesday, only 9 percent of an eligible 2.7 million borrowers had seen their mortgages modified under the new program as of the end of July. Some lenders had not reported modifying a single loan.

Bank of America Corp. and Wells Fargo & Co. — which have received billions in federal bailout money — were below average. BofA has modified just 4 percent of eligible loans under the program.

In a statement, Bank of American said it has provided additional loan modifications that don’t show up in the government data, but that it still has a lot of work to do to stem the pace of foreclosures.

“Despite our aggressive efforts to find solutions for homeowners in default, we must improve our processes for reaching those in need,” the bank said. “ Additionally, we continue to work with Treasury to find solutions for at-risk homeowners who fall outside the eligibility requirements of the current program as well as the growing number of customers now unemployed.”

Wells Fargo has modified 6 percent of eligible loans . Wachovia Corp., which was taken over by Wells Fargo last December, has modified just 2 percent.

"We know we've fallen short of our customer service goals in some cases," Mike Heid, co-president of Wells Fargo's mortgage unit, said in a statement. He said the company is aiming to streamline its modification process to a single phone call for most eligible borrowers.

For more than a year, Congress and the White House have struggled to help homeowners at risk of foreclosure, some of whom were victims of predatory lending and others who were simply approved for loans they couldn’t afford.

The Bush administration’s Hope Now Alliance, a voluntary consortium of lenders and loan servicers, had some early successes. But the program was plagued by a “redefault” rate of more than 50 percent because many borrowers were offered new loans with little or no reduction in payments.

In April, Congress approved the Obama administration’s program, which offers cash incentives to servicers who help for troubled borrowers. At the time, the administration said it expected as many as 4 million homeowners to get modified loans.

But according to Tuesday’s report, the pace of loan modifications has slowed. White said that under the Hope Now program, roughly 370,000 loans were modified in the first quarter. Under the Making Home Affordable program, lenders and servicers have completed just 235,000 “trial” modifications, which will be made permanent if the homeowner remains current for three months.

"We think they could have ramped up better, faster, more consistently and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy," said Michael Barr, assistant treasury secretary for financial institutions. "We expect them to do more."

Since the pace of defaults and foreclosures began rising two years ago, lenders and loan servicers have complained they are badly understaffed to cope with the wave of homeowners seeking new loan terms.

“The No. 1 bottleneck now is the voluntary nature of the (Obama administration’s loan modification) program,” said John Taylor, president of the National Community Reinvestment Coalition.

Since the foreclosure crisis began, Congress and the White House have tried several times to put pressure on the industry to speed the pace of loan modifications. The most hotly contested proposal would allow bankruptcy judges to modify loan terms form the bench. But the mortgage industry has fought the measure fiercely and  so far blocked it.

The pace of loan modifications varies widely among lenders and servicers. The best results among large loan servicers came from Saxon Mortgage Servicers Inc. One in four of Saxon's 84,000 eligible borrowers has received a trial loan modification with a lower monthly payment. Aurora Loan Services, GMAC Mortgage and JPMorgan Chase all had one in five qualified borrowers in a trial loan.

American Home Mortgage Servicing, with 153,000 eligible borrowers, was among the servicers that has not yet reported a single loan modification.

David M. Friedman, president and CEO, said the company only joined the program July 22 and expects to help 60,000, or about 40 percent of its borrowers.

Loan servicers who participate in the new program can earn up to $4,500 for every loan they modify. The reduction in payments means that investors who own bonds backed by these modified loan will suffer a loss. Since any given mortgage may be backed by bonds held by hundreds of investors, some servicers still face pressure from investors not to modify loans.

“Given that (the program) is voluntary, not a lot of loans are being rushed into the pipeline because of the fact that there is a loss,” said Taylor. “(Lenders and servicers) may have calculated that it’s better to wait for the market to turn and then suffer less of a loss.”

Unless the pace of foreclosures can be slowed, the fragile economic recovery could be at risk.

“The idea that we're going to drift along in a foreclosure crisis with foreclosure levels at triple pre-crisis levels — that’s just throwing in the towel on any kind of recovery,” said White.

Meanwhile, Scott says she’ll continue to try to work with Bank of America on a more affordable loan.

“It’s been a good year and a half, and they just don’t seem to understand,” she said. “I’m running out of ideas.”