By: Jessica Silver-Greenberg | Wall Street Journal
The Obama administration's program to help struggling borrowers keep their homes is being hurt by the same miscommunication, botched documents and other snafus that caused the original foreclosure crisis. After J.P. Morgan Chase & Co. agreed in January to her trial loan modification under the Home Affordable Modification Program, Stephanie Lulko made six $767-a-month mortgage payments, even though the bank said it had no record of her loan and then warned in a letter that she would be foreclosed on unless she paid $4,091.94. The 44-year-old Ms. Lulko, of Oklahoma City, says bank employees told her to ignore the letter. Their tune changed in June, when J.P. Morgan said she earned too much to qualify for a permanent modification. The problem this time: The bank's numbers were wrong. "I wish I had never applied for this modification," she says. In September, the bank rejected her request for a permanent loan modification for a second time. She faces foreclosure unless she pays nearly $5,000-the difference between her original and modified loan payments, plus late fees. Ms. Lulko has been unemployed since her temporary job at the U.S. Census Bureau ended in August. J.P. Morgan denies any wrongdoing related to Ms. Lulko's loan. "We worked with the borrower over a number of months and communicated the status of the loan modification during that time," spokesman Tom Kelly says. He adds that the lender has converted 29% of temporary modifications into permanently reduced payments as of September. The foreclosure-paperwork furor is deepening criticism of the U.S. government's high-profile mortgage-restructuring effort, which has fallen short of its goal of helping three million homeowners. More than half of the 1.4 million borrowers approved for temporary modifications have fallen out of HAMP because they didn't qualify.
The program "has undoubtedly put people into foreclosure," says Neil Barofsky, the special inspector general overseeing the Troubled Asset Relief Program, which funds HAMP. "It's a parade of documentation horrors." In a report to Congress on Oct. 26, Mr. Barofsky concluded that some borrowers seeking loan modifications through HAMP might wind up "worse off than before they participated." Back payments, penalties and late fees triggered when homeowners are rejected for a permanent fix can push some borrowers over the edge, he said. As part of HAMP, mortgage services and investors get financial incentives to modify a borrower's loan payment to 31% of monthly gross income. Servicers typically hit that number by lowering interest rates or extending a loan's life. Borrowers must make at least three "trial payments'; to be considered for a permanent fix. Borrowers, who miss a payment or otherwise fail to win a permanent modification essentially are stuck with the original terms of their mortgage. "The trial period provides homeowners an immediate reduction in payments at no expense to taxpayers," says Andrea Risotto, a Treasury spokeswoman. "It is the gateway for many homeowners to get the help they need."
The Treasury Department doesn't record how frequently errors occur with documentation on home loans submitted to more than 2,5.00 financial institutions and servicers empowered by the U.S. government to grant and reject HAMP requests. An outside review of borrowers denied permanent modifications disagreed with the servicer's decision in 4.8% of the loans' during the fiscal quarter ended in August. Treasury officials don't keep track of how many of the disputed loans are subsequently averted from foreclosure. Ms. Risotto says borrowers can call a counseling hotline if they believe they were wrongly denied. Meanwhile, anecdotal evidence points to a modification process at least fraught with miscommunication and misunderstanding. Bank of America Corp. says it "inadvertently verbally reviewed" a loan-modification request by Lindsey Farnsworth of Sugar Hill, Ga., who started making reduced payments to the Charlotte, N.C., bank in May after being told she was "preapproved" for HAMP. Ms. Farnsworth, who quit her job after her daughter was diagnosed with leukemia, 'says she was stunned when Bank of America said in September that she didn't qualify for a loan restructuring because the mortgage was made by the Federal Housing Administration. Bank spokeswoman Jumana Bauwens says Ms. Farnsworth also isn't eligible for a loan modification under separate FHA guidelines "due to her financial situation." She was told last month to pay $4,860 or face foreclosure.
Loan servicers are required to follow government guidelines on loan modifications. Last month, the Treasury Department sent a notice "reminding them of their requirement to comply with all applicable state and federal laws," says Ms. Risotto, the Treasury spokeswoman. Mr. Barofsky says the over-sight is toothless, noting that no servicers have been fined for bungled paperwork or improper foreclosures. At the request of nine U.S. senators, Mr. Barofsky is auditing' whether servicers in HAMP are correctly following Treasury's guidelines when deciding whether borrowers should get a loan modification. The inspector general also is 'scrutinizing how borrowers are notified that they failed to qualify. Later this month, PennyMac Loan Services LLC plans to auction in a foreclosure sale the Queens, N.Y. home of Luis and Violeta Alvarez, who got a temporary loan modification from another loan servicer in February. Mr. Alvarez, 67, found about the sale when a lawyer called to say he had seen it listed on a website. His lawyer says Penny-Mac denied the couple a permanent modification but won't say why. Mr. Alvarez says PennyMac and the previous loan servicer have lost various paperwork eight times. "How can you do this to people?" says Yvonne Alvarez, adding that her father has made every payment on time since his $4612 a month mortgage was reduced to $2,440 in February. PennyMac declined to comment on Mr. Alvarez's case, citing privacy concerns. Sometimes, it can be hard for borrowers to tell if a servicer is putting them through HAMP or its own loan-modification process.
Last December, Connie and Michael Umphress got a "reduced payment plan" from Wells Fargo, & Co. for the mortgage on their Portland, Ore home. The couple thought their lower monthly payments were triggered by HAMP. Instead the San Francisco bank said last month that they were rejected for a permanent loan modification under an in-house Wells Fargo program. Wells Fargo warned it would foreclose unless they paid $12,000. Mr. and Mrs. Umphress were scrambling to come up with the money when Wells Fargo told them that they qualify for a temporary HAMP modification "It feels like Groundhog Day," she says. "We are relieved, though, and can breathe easier now." Vickee J. Adams, a Wells Fargo spokeswoman, says the December approval was based on "verbal or stated income," which isn't allowed under HAMP. As of September, 30% of temporary loan modifications by Wells Fargo had been converted to permanent fixes, she adds. Mr. Barofsky, a frequent critic of HAMP, says the foreclosure furor that erupted in mid-September convinced him even more strongly that mortgage servicers have wrongly denied permanent loan modifications' to deserving borrowers. "If there are problems like we've seen on one side of the shop, why would we expect anything different on the modification side?" Mr. Barofsky says in an interview.