Home Loan Modification Run-Around Continues

August 31, 2009

The foreclosure help run-around, as we call it here at the Consumer Warning Network, continues to rear its ugly head. Click here to watch and learn more.

For more than a year, we’ve told you about homeowners facing foreclosure who can’t get their lenders to work with them.  We had a flash of hope with President Obama’s new Making Home Affordable program, but so far it’s been a disappointmentCWN’S Angie Moreschi was interviewed about the “Foreclosure Help Myth” in this in depth report by CNN’s Jessica Yellin. Watch Jessica’s report above and read Angie’s editorial below: 

Homeowners Trapped in Unworkable Work-outs

By Angie Moreschi:

What we’ve learned over the past two years is it’s simply not in the banks financial interest to do loan modifications. The evidence stands tall in the statistics.  Participation in President Obama’s Making Home Affordable program has been anemic at best.

Bank of America has only offered 4% of eligible homeowners trial modifications under the plan.  Wells Fargo doesn’t fair much better at 6%.  JP Morgan Chase is doing a bit better. Chase has provided 20% of eligible mortgages trial modifications, but when you think about it, saying 20% is better is actually pretty bad.  That means 80% of eligible homeowners are not getting trial modifications.

A recent report by the Federal Reserve Bank of Boston lays out some of the clear reasons banks make it so hard for homeowners to get loan modifications.  Essentially, it comes down to money.  Banks avoid granting loan modifications, because it means losing money.

Loan Mods Lose Money for Banks

First, the study shows that 30% of people who become delinquent on their mortgage will fix the problem themselves, without help from the lender.  It also says as many as 45% of seriously delinquent homeowners offered loan modifications become delinquent again within six months.  That essentially creates a disincentive to help in 75% of cases.

Part of the reason so many of the loan modifications failed could have to do with whether the lender offered meaningful help in the first place.

The study examined 665,410 loans that subsequently became delinquent and followed 150,000 homeowners for six months after they got help. It found that only 3% of borrowers behind 60 days or more had loan modifications that actually reduced their monthly payments.

The whole point of a loan modification is to lower the monthly payment.  That’s the single most important indicator of whether the loan modification will actually help.  So, many of these modifications set the homeowner up to fail again. They are unworkable work-outs from the start.

Add to this the fact that loan servicers make big bucks on delinquent loans by charging fees and penalties, and it becomes quite clear why homeowners get such a run-around. Pure and simple: profit.

Smoke & Mirrors

Unfortunately, what we see is a disingenuous attempt by many lenders to make it appear as though they are helping, when they’re not. Their efforts are often punctuated by slick advertising campaigns to push the point.  The message falls flat for too many homeowners facing foreclosure.  All it does is create the false impression lenders are helping, when real people tell us very clearly, again and again, they are not.

All this from banks who took billions of dollars in taxpayer bail-out money. That cash brings with it some obligation on the part of these big financial institutions to do something to fix the problem they helped create. The mortgage meltdown lead us into the financial collapse, and we won’t really be able to claw our way back to financial recovery until the housing market stabilizes. That means fewer foreclosures, and more lenders working with homeowners to stay in their homes.

Name & Shame

The Obama Administration’s name and shame reports are a good first step. Every month the administration plans to put out statistics, as outlined above, on which banks are participating in Making Home Affordable and to what degree.  But more is needed. Some good old fashioned enforcement could nudge the whole thing along. It’s time to have an independent review board put into place to randomly review cases submitted to lenders for modification to ensure eligible loans are treated fairly.

Unfortunately, for now, the Department of Treasury says it wants to “work with” banks to get them to participate in Making Home Affordable.  Well, homeowners have been trying to “work with” their lenders for a long time now, and what many have gotten in return are endless hours on hold, misinformation and, all too often, unworkable work-out agreements.

It’s time to hold the banks accountable for their promises to help.  It will be good for homeowners, good for our neighborhoods and good for the economy.