The uphill battle to get a loan modification (© Melinda Fulmer)

Many homeowners desperate to save their homes face an uphill battle to get a loan modification. // © CJ Burton/Corbis

It has been almost two years since Danette Armstrong’s husband left her and she joined the millions of Americans fighting to hold on to their homes. Yet she’s still no closer to saving the Elk Grove, Calif., home she occupies with her two school-age kids.

Armstrong, 50, like many others, thought she was on her way to working out a modification with the company handling her loan.

She initially qualified under the Home Affordable Modification Program (HAMP) and paid the $1,620 payment her servicer stipulated (rather than the almost $3,000 payment she was making with her husband) for the several-month trial period outlined in the agreement. That was a couple of months ago, and she still has no permanent agreement to keep her house.

The foreclosure prevention program, designed to work through the millions of defaulted loans in this country, is flawed, analysts say, and will likely result in another huge wave of foreclosures hitting the market this year, despite moves by the Treasury to strengthen the program.

“There will be many foreclosed properties moving through the process and to a sale in the next six to 12 months,” says Mark Zandi, chief economist of Moody’s “It remains a significant threat to the recovery.”

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A drop in the bucket
Just 31,382 of the 728,000 borrowers undergoing a trial loan modification last year were converted to permanent status by the start of December 2009, according to Treasury Department figures released last month. Those numbers improved slightly in December with a year-to-date total of 66,000 loan modifications being accepted by borrowers, and an additional 46,000 mods being accepted, but not signed off on by the borrower.

Progress, to be sure, but it’s just a drop in the bucket of more than 3 million foreclosures expected in this country.

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Indeed, the number of foreclosure filings continued to accelerate in December, according to data firm RealtyTrac, rising 14% from the previous month and 15% from December 2008.

These data, analysts say — coupled with the low percentage of modifications — highlight the problems with the program and the servicing companies participating in it.

Of course, servicers also face their share of problems qualifying distressed borrowers for HAMP. Some of the biggest reasons are:

  • The borrowers are not currently living in their home or using it as a primary residence.
  • They are unemployed or have lost a significant amount of income during the year.
  • They already have an affordable payment that makes up less than 31% of their income.

Roadblocks and delays
Alexa Milton, ACORN Housing’s homeownership advocacy director, says that her group’s foreclosure-counseling clients have faced myriad problems with their modifications. (Learn about ACORN’s Stop Foreclosures Campaign here.)

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“We are seeing a significant number of cases that have either delays, unnecessary roadblocks or fall apart entirely between the process of being approved for a trial mod and being approved for a permanent mod,” she says. 

  • Review backlog: Counselors say that servicers are telling many borrowers after the trial period that they are backed up in the review process and to keep making monthly payments equal to the trial until they can catch up — even as delinquency fees continue to accumulate.
  • Repeat requests for the same paperwork: Distressed borrowers are asked repeatedly to send updated income documents, even if they have submitted full documentation to qualify for the modification trial.
  • Record-keeping problems: Some borrowers have been told they were approved for a trial modification and began making payments, only to be told midway through that there was no record of any modification on their account and that they needed to reapply.
  • Changing loan mod terms: And, less frequently, Milton says, clients are completing a three-month trial modification, only to be told that they will have a new trial period with higher payments.

Credit counselors and others in the loss mitigation business say there’s a host of reasons why foreclosure prevention efforts aren’t making more headway.

First, the loan servicing companies, hired by lenders and investors, are still not adequately equipped with the right staffing and internal systems and software to handle the huge number of distressed loans.

“You are asking (servicers) to do the right thing and try to assemble the right documents” to move these through, says Joe Filoseta, president and CEO of DepotPoint, a company that provides loan-default servicing systems. “But in order to do that, you need people and you need to train them and there’s a time delay associated with getting them and training them to work in this world.”

That means, he says, that you have people with very little training being asked to handle complex tasks such as verifying different sources of income, including cash income, child support payments and other supplemental income not found on a W-2 form.

The short staffing and lack of organized systems also means that faxed documents and important customer contact data are getting lost and return calls are not being placed to the borrower in a timely fashion, Filoseta says.

“There’s a lot of blood on the floor. These people are making their trial mods and their calls are not being returned,” he says.