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Thursday, March 4, 2010

Lenders distract homeowners with modifications while foreclosing as fast as possible

Lenders distract homeowners with modifications while foreclosing as fast as possible

The Mortgage Bankers Association says “Lenders generally go to foreclosure as a measure of last resort, after all other options, including loan modification, are exhausted.” NYT article here.  This MBA line maybe what folks want to hear, but it is not reality.  See news story below for some examples.

These examples are from Texas, but this is a national problem.  The federal government created HAMP to enable homeowners to modify their loans and avoid foreclosures but few permanent modifications have actually occurred.  The Program’s own Loan Modification Report here, shows that as of January 2010 less than 4% of borrowers that are more than 60 days delinquent have received permanent modifications.  The first step is obtaining a trial modification, and very few homeowners have been offered one (according to the report it’s about 37.3% of eligible borrowers).
One reason for this is that loan servicers give confusing information — often what borrowers are told on the phone conflicts with the information that they receive in writing.  For example, borrowers are told on the phone that while they are in review their house will not be sold, but continue receiving letters saying the lender is foreclosing.  Loan servicers tell borrowers not to worry about the documents they get as “it is part of the process.”  Then a few days before the sale, they unilaterally decide that the borrower has not provided a necessary document or piece of information, and proceed to the sale.
Further, servicers routinely lose borrower documents, want more, and then lose these.  No person is responsible or accountable for the loan file.  Instead, the division of labor is so fractured that a borrower might talk to 5 or 6 different customer service representatives in 3 or 4 different departments just trying to get an answer to a simple question such as “what documents are missing from my application?” Or “what program am I being considered for?”  All of these representatives are merely consulting a computer screen that may take days to update, and will only contain information if the appropriate representatives actually input it.  The result is that servicers spend disproportionate resources pushing customers from one department to another, and never actually problem-shooting to resolve the minor defects in modification applications.
Servicers claim that they are overloaded and are working as fast as they can.  I believe them on this point – they are overloaded because they allocate the bulk of their resources to representatives that talk borrowers in circles reading inaccurate information off computer screens, rather than to training representatives to analyze and resolve problems.  And servicers are working as fast as they can – to foreclose on homeowners.  Why?  The answer to that question is discussed in an article by the National Consumer Law Center (NCLC) : “Why Do Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior” here.
The national bait-and-switch program is working perfectly.  They trick people and distract them with dreams of modification, and meanwhile foreclose on the home. Lenders merely get borrowers to chase their tails, and never even tell them that their HAMP modification application has been rejected.  Of course they do find out, after it is too late to run to bankruptcy court.  This is not an accident; this is their playbook.  See Report by NCLC and National Association of Consumer Advocates here.  See National Survey of Realtors finding that HAMP has not helped stem the tide of foreclosures in their region  here.
As for the second step of the modification process, permanent loan modification, Bank of America was just sued for promising to make modifications to loans at a foreclosure clinic and failing to do so.  So far in our office, we have seen one permanent modification.  Bank of America and Wells Fargo were sued in Massachusetts for providing trial modifications, but failing to permanently modify the loan.  Articlehere.  HAMP guidelines are ridiculously weak.  They allow lenders to continue the foreclosure process even when they are considering a modification application.  See Supplemental Directive 09-09 here at Page 10.  Lenders are prohibited from conducting a sale when they are still considering a modification, but what they say typically is that the borrower is not eligible the day before.  Why not make that a clear ban?
Q1106. Must servicers suspend foreclosure or not initiate foreclosure for all borrowers who are potentially eligible for HAMP?
To ensure that a borrower currently in foreclosure or at risk of foreclosure has the opportunity to apply for a HAMP modification, servicers should not proceed with a foreclosure sale until the borrower has been evaluated for the program. Additionally, servicers are strongly encouraged not to initiate foreclosure until a borrower has been evaluated and determined to be ineligible for the program or the borrower fails to respond to a HAMP offer that has been made by the servicer.
HAMP 1106 FAQ, at page 3, as of February 25, 2010 here .
And while the guidelines require homeowners to get written decisions from the lender regarding their applications (see HAMP Supplemental Directive 09-08 of November 3, 2009 here), the Federal Reserve has conveniently decided that ECOA (Equal Credit Opportunity Act) does not require written decisions on HAMP applications where the borrower is in default.  See Federal Reserve Bank Consumer Affairs Letter CA-09-13 here.  Once again the Federal Reserve puts the people above the banks.  The result of this matters — borrowers may find it much harder to take action based on a violation of a supplemental directive as compared to ECOA (and the lenders know it).  As a result, we see few lenders providing written denials of loan modifications which means borrowers are kept in the dark until it is too late.  The document lenders do provide regularly that indicates that a homeowner’s HAMP application was denied is an eviction notice after they foreclosed already.
As we predicted long ago ( here), HAMP is a total failure.  HAMP was supposedly the industry suggested program that was going to work as an alternative to giving bankruptcy judges the authority to modify residential loans (like they have for loans on second homes and boats).  Not surprisingly, the lenders’ solution was a victory for them and an insult to the rest of the world.

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