If you’re evaluating whether to enter a “temporary” loan modification, read this article closely.  I’ve spoken with hundreds of homeowners with similar experiences, and it’s not a pretty picture.  It’s so bad, I’d argue that most people who can’t afford the normal monthly payments are better off not paying at all.  

As it’s Halloween, let’s call “temporary” loan modifications what they are – a trick.

By Cami Joner
Columbian Staff Reporter

Sunday, October 31, 2010

Jacqueline and Joseph Freeman thought they were doing everything possible to keep from losing their Battle Ground house and farm when they obtained a temporary mortgage modification through a federal program in 2009.  But despite not missing a single month’s payment during 12 months at a “trial” reduced mortgage rate, the Freemans are worse off now than in late 2008, when their income fell dramatically due to canceled bookings at their farm-school business, Friendly Haven Rise. 

Last month, the Freemans received a foreclosure notice from their lender, Wells Fargo, which said the couple’s mortgage is $23,000 in arrears. They feel betrayed by the federal program that was set up to help, Jacqueline Freeman said.  “We had no clue we were headed toward foreclosure,” she said. “We thought we were taking part in a national program that was helping people.”

The Freemans are not alone. They are among millions of American home owners who are frustrated with the Obama administration’s Home Affordable Modification Program, or HAMP, a $75 billion federal program that was supposed to be their salvation. Instead, the program appears to be failing droves of homeowners who, like the Freemans, have been drawn into trial modifications that leave them with more principal outstanding on their loans, less home equity and worse credit scores.

Launched in February 2009 with $50 billion from the U.S. Treasury Department and $25 billion from taxpayer-owned enterprises Fannie Mae and Freddie Mac, HAMP promised to help between 3 million and 4 million homeowners modify their mortgages. Twenty months later, only 495,898 U.S. borrowers have received permanent loan modifications, according to a newly released federal report.

In Washington, 9,054 homeowners have been helped with permanent mortgage modifications through HAMP, and another 3,390 are in trial modifications. Many others have entered the program and then exit without receiving a permanent modification. Meanwhile, 17,670 Washington households faced foreclosure in the three months ending Sept. 30.  The program and its predecessor, Making Home Affordable, have helped very few troubled homeowners in Clark County, a suburban community where the foreclosure rate is the fourth-highest in the state with one out of every 374 housing units in foreclosure.

HAMP runaround

According to a Vancouver foreclosure counselor, the problem with HAMP is that banks don’t stick with its trial payment period guidelines, which state that temporary help should last no more than three months before borrowers receive permanent modifications to their mortgages. Instead, many lenders stretch trial modifications out for months or years as homeowners deplete dwindling savings accounts in a futile effort to get stable relief.

“I’ve got clients I’ve been working with for over two years that have had no permanent resolution,” said Kevin Gillette, program manager at the nonprofit Community Housing Resource Center in Vancouver.

The agency provided counseling to more than 1,000 local households from Oct. 1, 2009 through Sept. 30, but Gillette said he has few success stories to share.  He said the HAMP trial period is supposed to last only long enough to test whether the homeowner is committed to making the modified payment. However, Gillette said lenders often keep taking the reduced monthly payments for six months or longer.  “In the end, they deny the permanent modification,” leaving bewildered borrowers wishing they had saved the money instead.

Gillette finds the situation appalling. He blames mortgage banks, which, he said, have little to gain from permanent HAMP modifications and just waste the homeowners’ money and time while keeping them suspended in trial payment limbo.  “Why not tell homeowners no, you’re not going to help them and let them go on about their business?” he said.

That might have helped the Freemans, who contacted their lender at the first sign of mortgage distress. They were told they would be eligible for HAMP if they skipped two months’ worth of payments.

“It was actually easier those months,” said Jacqueline Freeman, who used the reprieve to pay off other bills.

Gillette warns his clients not to follow the advice to skip monthly payments, which will immediately put an already-troubled homeowner in mortgage default.  “Nobody should be telling anybody this, but they do,” Gillette said.

Though few in the mortgage industry defend HAMP, many bank lenders deny claims that they’re giving bad advice. The challenge, according to a Wells Fargo Bank spokesman, is that a mortgage modification often can’t help a homeowner who’s been caught in the downward spiral of economic recession and unemployment.

“The bottom line is, if you had a job before and now you’ve lost it, even if we modify the loan, with zero income, the customer cannot afford to pay it back,” said Tom Unger, a Portland-based spokesman for Wells Fargo.

Unger said Wells Fargo and other banks often see more success with in-house modification programs that avoid the confusion of the government-driven HAMP.  “When the government programs were first announced, people’s expectations ramped up and then the (program’s) rules kept changing,” he said.

Mortgage black hole

The Freemans thought they were benefiting from the trial modification that reduced their monthly payment from $2,150 per month to a more manageable $1,390. Now Jacqueline Freeman would like to know what happened to the total $16,680 they shelled out over the course of 12 months.  “How could the bank say we are $23,000 behind? That part doesn’t make sense to us,” she said.  Gillette said most homeowners don’t understand that trial reduction does not reduce the loan’s interest rate.

“All the while, that loan balance is growing until (the homeowner) is so far in the hole there’s no way they can ever come out of it,” said Gillette, who has seen numerous homeowners devastated by trial modifications.

Some have left his clients in arrears by as much as $70,000, he said.

“The banks are setting these people up to fail,” said Gillette, a former mortgage professional who theorized that mortgage lenders would rather foreclose on the house and write off the bad debt.  Banks, on the other hand, insist that their institutions want to help, rather than end up in the real estate business.

“A foreclosure is not good for the customer, not good for the community and not good for us. It’s always going to be the last option,” Unger said.  That said, banks have lately run into problems for rushing the foreclosure cadence.

Rushing the cadence

Earlier this month, banks came under scrutiny in the wake of the disclosure that many had used “robo-signers,” or people who rushed to sign thousands of documents a day without reviewing the details.

“Some of these practices can deprive homeowners of their legal right to save their homes,” said Rob McKenna, Washington state attorney general.

As a result, the nation’s largest mortgage company, Bank of America, temporarily halted foreclosures. The attorneys general from all 50 states launched an investigation. Other large lenders, JPMorgan Chase, Ally Financial Inc. and PNC Services stopped foreclosing in up to 23 states.

However, the hoopla has largely died down, as Bank of America is pushing ahead with a new wave of foreclosures, according to The Associated Press.

Some say putting the blame entirely on banks and the government isn’t fair. After all, homeowners sign a contract, a note and deed of trust that shows an obligation to make the payment, said Mark Saftich, a senior mortgage director for Director’s Mortgage Inc. in Vancouver.

“That’s why there is so much paperwork at the closing table,” Saftich said. “It is signed by all parties stating they will pay the lender the amount over the life of the loan with a clause that says, if it’s not paid, notice will be given and the house will be foreclosed.”

Jacqueline Freeman said the notion of foreclosure never entered her mind when she and Joseph purchased their home and 10-acre farm in 2003.

Lessons learned

But the Freemans say they’ve learned some hard lessons about trusting mortgage providers and the government’s HAMP program.  “The main thing is, it doesn’t stop the clock on the foreclosure, in spite of paying out all that money,” Jacqueline Freeman said, adding that she remains optimistic about saving the farm.

The Freemans put in a call to Sen. Patty Murray at the height of the senator’s election rebid. Murray’s office has pledged to help the Freemans, who say they will do whatever it takes to avoid foreclosure, Jacqueline said.  “We are fine, upstanding, taxpaying citizens with a farm,” she said. “It’s not just a house. It’s our business and everything we do.”