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Mortgage Modification Woes

Two clients try to navigate the mortgage-relief labyrinth.

Helen Modly, 03/11/2010

The Obama administration's foreclosure-prevention program opened a year ago and is scheduled to run through 2012. The $75 billion Home Affordable Modification Program calls for companies to help as many 4 million struggling borrowers by modifying loans so monthly housing payments are no more than 31% of monthly gross income. Separately, homeowners who haven't missed a payment can refinance into lower-cost loans even if they have little or no equity. This is expected to help up to 5 million homeowners.

Oh, if it were only true.

Mortgage lenders have been in the news lately expressing surprise that relatively few borrowers are taking advantage of the Making Home Affordable program for distressed homeowners. They are also claiming that of those borrowers who have inquired, many never returned the necessary paperwork to be considered.

Our firm has been closely involved with two of these homeowners. Here is their story.

Fred and Wilma found themselves in a tight spot when Fred was laid off from his company after 22 years of service. When he started at the company, there were promises of a generous pension. Fifteen years into his career, the pensions were eliminated--but that's another story.

Fred & Wilma made a 20% down payment on their home and put a significant amount of money into improvements. Because the house was bought at the peak of the housing bubble and possibly had an exceedingly optimistic appraisal (yet another story), the house is now worth less than the mortgage. Wilma is still employed, but her salary doesn't quite cover their current living expenses. After using up their cash reserves, they are now tapping Fred's IRA for the monthly shortfall. This is a real concern, because Fred and Wilma are in their mid-to-late 50s and have no other assets to fund their retirement.

In March 2009 the couple contacted their lender to inquire about TARP relief. Their credit score was an impressive 904, they had no other debt, and they were making their mortgage payments on time. The lender asked them to make a loan-modification proposal but refused to provide any guidelines and declined to explain what it was looking for. For the next several months, Fred and Wilma called the lender weekly and were consistently assured that their proposal was being reviewed and that they could track the progress online. All attempts at accessing any information via the lender's website failed. At one point Fred spent more than an hour being transferred around until he finally spoke to someone who admitted that the online service had never worked.

One day they were told that their case had been assigned to someone new, but they couldn't contact that person directly or ask questions. The new case manager called in June to say that they had been rejected because their income was too low. But in its generosity, the lender would allow three monthly payments to be skipped. The only catch was that in the fourth month, that payment plus the three skipped payments would be due, along with a $450 penalty. Fred and Wilma declined the generous offer.

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