The truth about mortgage relief

A former employee at a major bank who helped homeowners facing foreclosure gives an inside view of how relief programs fall far short of what's needed.

A foreclosure sign in front of a house in Falls Church, Va. (Kevin Lamarque | Reuters)A foreclosure sign in front of a house in Falls Church, Va. (Kevin Lamarque | Reuters)

IF YOU'RE a homeowner who has fallen behind on the mortgage and you call your bank, you usually end up talking to someone like me. I was a "home preservation specialist"--the euphemism that many banks give to employees who talk to homeowners who have fallen behind on payments and are in danger of losing their homes.

It's hard not to laugh when I hear news reports about foreclosures going down or the announcement of a new federal program to help troubled homeowners or the bankers saying they want to work with borrowers. I would laugh if the reality of the mortgage crisis wasn't so overwhelmingly depressing.

When I think of the hundreds of people I've talked to, the hundreds of families who wanted me to help them avoid foreclosure and financial disaster, and the hundreds who did lose their homes, I want to scream, not laugh.

To give you a sense of how ineffective most home preservation programs are--and how the banks are dooming so many of their customers--let me walk you through a typical scenario for a homeowner in distress.

- - - - - - - - - - - - - - - -

LET'S SAY you're a homeowner with a husband and two kids. You recently lost your job, and your household income has been cut in half. To keep up payments on your mortgage, you cut down on groceries, decide not to go out much and take money out of savings.

The job search doesn't go well, and your savings start to run down. If you want to keep up payments on your own, you might have to think about taking money out of your 401(k) retirement savings (assuming you have any), selling some possessions or even falling behind on other bills and credit cards.

Then something unexpected happens--you have car trouble and have to pay hundreds of dollars for repairs, or one of your children gets ill and you have to cover co-pays and prescriptions. You pay with money that would have gone to the mortgage, and you fall behind on your payments.

To avoid falling further behind, you call the bank that services your loan to discuss your options. Talking to somebody can be a frustrating process to begin with (we'll get back to that later). When you finally reach a customer service representative, you ask for help.

First, you ask if it's possible to reduce the principal balance on the mortgage. Like many homeowners, the value of your property dropped below the amount you paid and the amount you owe--you're "underwater," according to the now well-known lingo. There are provisions for principal reduction under some of the federal government's programs to aid homeowners. But if your loan is owned by Freddie Mac or Fannie Mae--as over half of the properties in the U.S. are--then you can't apply for principal reduction, because you already fell behind on payments. Your eligibility is void.

Next, you ask about loan modification. A modification is where your bank changes some conditions of your mortgage without changing the balance owed--like lowering your interest rate or extending the term of the loan to lower your monthly payment.

But you're out of work and receive unemployment benefits. Most banks don't consider jobless benefits to be reliable income because they run out at a future date. Many homeowners who experience unemployment won't get a loan modification, since based on your bank's guidelines, you're technically a zero-income household. Even if it were to lower your payment, the bank will calculate that you won't be able to afford your other expenses and your mortgage, too.

Luckily, your husband still has his job, so there's still money coming into the household. If you apply to the Home Affordable Modification Program (HAMP), it could lower your monthly payment to match 31 percent of your gross monthly income. For some people, that's hundreds of dollars a month.

But if the home preservation specialist doesn't think you could afford even a modified mortgage payment, plus all your other expenses, you will be denied. The specialist has to take everything into account--taxes and Social Security deductions, along with benefits (assuming you have any), plus food, utilities, telecommunications, transportation, medical costs and any additional credit cards or car loans--before they calculate whether you can afford a monthly payment under HAMP.

It's obvious to people in trouble on their mortgage what they have to do to improve their eligibility for a modification. They cut out everything: clothing, haircuts, charitable contributions, subscriptions, movies, cable. Some people are so desperate that they give up a car or drop their health insurance.

As for you, you consider taking a part-time work at minimum wage, with no benefits, just to try to boost your income enough to qualify for a loan modification.

- - - - - - - - - - - - - - - -

IF THE home preservation specialist agrees that a modification might work you have to endure a hellish application process.

First, you complete a mountain of paperwork. You gather three months of pay stubs, three months of bank statements, last year's tax return, utility bills and unemployment checks. You write a hardship letter explaining why you fell behind and compile a full household budget. All together, there's close to a hundred pages, all of it signed and dated.

Once you find everything, you send it in. What follows is a review process that can take months, and you have to update the same documentation every 30 days. If the bank doesn't get your paperwork--whether because it was lost in the mail or misfiled because of its own bureaucratic incompetence--the bank can cancel the whole review process.

Let's say that after months of waiting and sending in more documentation all the while, the bank decides to put you on a trial payment plan. You will pay your modified payment for three months to prove to the bank that you can cover the amount it set. If you're one dollar short or one day late on your payment, you're kicked off the program, no matter what the reason. Sometimes, homeowners end up in a trial much longer than three months--up to nearly a year, while nervously awaiting a final decision.

So you complete the trial payment period, and to your relief, the bank agrees to permanently modify your mortgage and lower your monthly payment. Somehow, you manage to pay your mortgage in full, plus all your other expenses. You're almost certainly living from paycheck to paycheck. If you face another unexpected hardship--if, for example, your husband loses his job, if a child needs urgent medical care, if your roof cracks--then there aren't many options left.

If you have a mortgage backed by Freddie Mac or Fannie Mae, you may be eligible for another modification. But you have to wait almost a year after your previous loan modification. And, assuming another modification would help, you have to go through the whole painful process all over again.

The other option aside from the Home Affordable Modification Program is to apply for aid under the Hardest Hit Housing Market fund. Only 18 states plus the District of Columbia have been awarded the money, which is supposed to help homeowners in the parts of the country that have been hit hardest by the crisis. According to news reports, only a small fraction--around 3 percent as of December 31, 2011--of the $7.6 billion earmarked for the Hardest Hit fund had been dispersed.

- - - - - - - - - - - - - - - -

THE KEY problem with all these programs is that everything is left to the whim of the bank. There is nothing to force lenders to grant a modification, principal reduction or reprieve to customers. If the bank decides that more money can be made by putting someone through foreclosure, they can do it, without fear of any sanction or restriction.

I've seen cases where homeowners have to pay a higher monthly payment after a modification. The appeals process is nonexistent. If the bank only offers to lower your monthly mortgage payment by $20, it's take it or leave it. Many people I worked with took even meager modifications like this--because they don't get any other option.

That's probably the main reason why the Home Affordable Modification Program has failed so dismally. According to the National Taxpayers Union, the program has led to around 500,000 permanent modifications--far short of the goal of helping 3 to 4 million homeowners facing foreclosure. And the biggest problem is that while the government is providing the money, the banks are making the decisions on who gets help.

Even if the banks wanted to be helpful to customers--and that's a very big "if," of course--there's a huge infrastructure problem because the demand for help is so massive.

It's common for home preservation specialists like me to have caseloads of 100 clients per month. One employee has to review nearly 100 pages of documentation for each homeowner and decide whether the case should go further in the process. It's not a one-time review either--every application will have mistakes in the application or missing documents, and the specialist is supposed to track down the applicants to get the right data or paperwork. It's an unmanageable workload.

The bureaucracy of the banks is a huge barrier for homeowners trying to find out whether they can get help. Talking directly to a human being at your bank is a relic of the past. Employees at the local branch of major banks will tell you to call the 800 number. Even when you've gotten a single contact person for a loan modification application, getting through to them is difficult, especially because they're so overworked.

The bureaucracy is so vast at most banks that the left hand doesn't know what the right is doing. So homeowners can discover that the foreclosure process against them is being accelerated even while their request for a loan modification is under review.

Another common problem is paperwork disappearing. I've had clients who faxed their documents to designated phone numbers or had it delivered by Fed Ex overnight delivery, and even with recorded delivery confirmations of both faxes and packages, the documents vanished into the bureaucracy.

For anyone who has to go through it, the loan modification process is unbearably long and frustrating. Many wait so long to get word back about their application that they give up and eventually lose their homes because they failed to do something they needed to in the interim. Or the fear and stress win out, and they decide that it isn't worth trying to work with the bank.

In fact, according to the National Taxpayers Union, far more people have dropped out of HAMP than have gotten help.

- - - - - - - - - - - - - - - -

TO BE clear, programs like HAMP and the Hardest Hit fund do save some families from foreclosure. I personally helped dozens of people avoid losing their home. But I also worked with hundreds of people who ultimately lost theirs.

And those are the grim odds for "home preservation"--far fewer people have gotten help than have been kicked out of their houses. The national statistics on foreclosures have gotten better, but they're still stunningly high. In January of this year, for example, one out of every 624 households got hit with a foreclosure action of some kind--a notice of default, an auction sale, a bank repossession. That's 211,000 individuals and families, just in one month alone--on pace for around 2.5 million foreclosure actions in a year, in an economy that's supposedly been in recovery for several years.

What are some immediate solutions? When I worked as a home preservation specialist, my phone calls at the customer service center were monitored. Often, when I told a person that they didn't qualify for assistance, they would ask me what to do next. It took a lot of restraint not to say that they should gather their neighbors and friends to occupy their home. I wanted to tell customers that the best defense against foreclosure was to get community support for direct action.

People should be inspired by the home defenses in places like San Francisco, Oakland, Portland, Chicago and New York City. A bank can do whatever it pleases as long as it holds all the cards. When homeowners stand up and make their situation public--and then take action to defend their homes--they stand a better chance.

In some of these cities, pressure is being put on government officials to put a moratorium on foreclosures--especially in light of the scandals of the banks using fraudulent means to push through foreclosures. Protest is key to keeping up this pressure until we win this.

Ultimately, putting an end to the foreclosure crisis will require a complete transformation of the for-profit housing market. As long as homeowners have to rely on borrowing money from banks to get a decent house, as long as banks operate for profit over human need, as long as government policies are shaped to keep the profit system intact, there will be foreclosures and suffering.