A $75 billion federal program to help homeowners avoid foreclosure has not produced the anticipated results in North Carolina since it was launched in February 2009 and lenders are to blame, according to Legal Services lawyers in Charlotte.
Attorney Lois Grossman, director of the consumer protection program at Legal Services of the Southern Piedmont, said that the Home Affordable Modification Program has largely been a failure.
“It has been a failure because lenders and servicers aren’t facilitating the program properly,” Grossman said. “We have had a 25 percent success rate in our office. I think we have to call that a failure.”
As of December 2009, the New York Times reported that only about 31,000 homeowners nationwide had received permanent modifications. A May 17, 2010, report from the administration’s Making Home Affordable website, however, said almost 300,000 permanent modifications had been done.
The report also contained information about loan-servicer performance.
HUD Assistant Secretary for Housing David Stevens said “[F]oreclosure starts are down 27 percent from last year this time; and home prices and the pace of home sales have stabilized in recent months.”
Stevens relied on the Mortgage Bankers Association’s May 19 report, which showed that N.C. was among the states with the highest year-over-year increase in foreclosure starts.
Servicers to blame
Grossman doesn’t fault policymakers who sought to help struggling homeowners.
“It’s a great idea if everyone does what they are supposed to do,” she said.
Banks and lending institutions that accepted funds from the Troubled Asset Relief Program are required to participate in HAMP. Others have committed to the program voluntarily.
“Servicers aren’t doing what they are supposed to be doing,” Grossman said. “There are too many hoops for borrowers to jump through. We are attorneys and we have been banging our heads against the wall for months not getting any further than anyone else.”
Grossman one of the problems with HAMP is that lenders stand to make more money by denying applications than accepting them.
“The servicers make money on all the fees they charge. There isn’t an incentive for the servicers to want the borrower to succeed in the program,” she said.
If that is true, then the program may be doing the opposite of what it was designed to do. It may be creating a false hope for borrowers who have a rude awakening when their plan is rejected.
While an application is pending, late fees and other charges that normally would accrue are held in abeyance, Grossman explained.
If a plan is rejected, however, a borrower is responsible for all the fees that have accrued during the time in which an application has been pending.
“That can be a lot of money,” she said. “A lot of money people don’t have.”
Struggling borrowers seek relief
Grossman said a variety of factors led her clients into financial distress.
“Some borrowers were on fixed incomes and got into ARMs. They were able to pay the initial teaser rates, but when rates began to rise, they were unable to make payments.”
Other borrowers had a change in life or work circumstances that affected their cash flow.
Grossman said one of her clients was working full time when he was diagnosed with cancer. Eventually he was awarded Social Security disability, but he was unable to make his monthly mortgage payments.
After a trial period, the borrower’s servicer, HomEq, instituted a new permanent payment plan about $200 per month lower than the borrower’s old rate.
“He hasn’t called me, so that means he’s doing all right,” Grossman said with a chuckle. “That’s our success story.”
Mind-numbing enrollment process
In order to enroll in HAMP, borrowers have to complete a hardship affidavit explaining why they are unable to meet their monthly obligations under a note and loan agreement.
“They have to explain what circumstances led to their financial situation changing,” said Legal Services staff attorney Lauren A. Rico.
“They also have to provide income information including a list of assets and expenditures. This must be backed up with bank statements, W2s, pay stubs, Social Security award letters, utility bills, tax returns and a 4506-T.”
A properly completed and signed 4506-T enables third parties to obtain transcripts of a borrower’s tax returns.
“Unfortunately, what must be provided varies depending on the servicer and whichever representative you are dealing with from the servicer,” Rico said.
Grossman said that one client’s plan was rejected “at the 11th hour” because one line on the 4506-T was incorrect. “First they said the borrower’s wife’s name needed to be on the document. Then they said her Social Security number had to be on the document. Then they said the dates were wrong.”
Based on purported errors on that one document, the entire plan was rejected.
“That puts us back at square one,” Grossman said.
Rico said Houston-based Litton Loan Servicing has given her as many as eight different instructions on how to fill out a 4506-T.
For one borrower, Rico sent the document to Litton at Litton’s request 14 different times. She said fax confirmations and certified mail receipts prove it.
Rico estimated that she spent more than 40 hours on the phone with Litton on behalf of one client. “I never talk to the same person twice,” she said.
Rico explained that customer-service personnel are not trained to deal with HAMP.
“They don’t know what they are doing or why they are doing it. Representatives will refer me to a supervisor who never returns calls, or to a processor who apparently makes all the decisions. The representatives won’t even identify who that person is, much less transfer me or give me the processor’s number.”
Rico added that “Every time you call, you have to reinvent the wheel.”
How it’s supposed to work …
Many borrowers with adjustable-rate mortgages are unable to pay the increased amount when the ARM is adjusted. HAMP calculates the payment amount a borrower can afford (roughly 31 percent of gross income).
Once a borrower >has completed a three-month trial period, the modified interest rate must remain in place for five years, after which time the interest rate will be gradually increased 1 percent per year or such lesser amount as needed until it reaches the interest rate cap.
> Some details of the procedure are:
* Lowering the interest rate. The Treasury Department is providing incentives to servicers to write down interest rates to as low as 2 percent. A borrower’s interest rate will be reduced to a point at which the modified payment equals 31 percent of the borrower’s monthly gross income.
* Extending the term. If a 2 percent interest rate results in a payment that is more than 31 percent of a borrower’s gross monthly income, the servicer can extend the payment term. At the servicer’s option, the term can be extended up to 40 years.
* Forbearing or deferring principal. A servicer may defer a portion of the principal amount owed until the maturity of the loan. This is called a principal forbearance. With forbearance, a borrower still owes the principal, but repayment is deferred until a later date.
* Forgiveness. Servicers also have the option of forgiving a portion of the loan principal. This is optional on the part of the servicer. There is no requirement for principal reduction or forgiveness, and there is no guarantee that a servicer will offer principal reduction or forgiveness.
— Information provided by Legal Services of the Southern Piedmont