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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.

Fast-Forward to October 2009
Out of the blue, the lender calls and says that Fred and Wilma's loan reset was being reconsidered and that they should send in their proposal, financial statements, W-2s, tax returns, pay stubs, etc. again. At the same time, Congress and the media were questioning why so many homeowners weren't sending in their paperwork and why so few were trying to take advantage of the federal program. Coincidence?

In November the lender sent a letter offering a Special Forbearance Agreement. Fred and Wilma were asked to send in three monthly payments at a new reduced amount. At the end of the three-month period, the loan would be considered contractually not current and they were told that there may be outstanding payments and fees. If the loan modification was approved, the past due amount would be considered satisfied, but an additional contribution might be required. The lender refused to elaborate as to what the modified terms might be. Fred and Wilma were not told what changes might be made to the outstanding principal balance, interest rate, length of loan . . . nothing.

Despite the sketchy information, Fred and Wilma felt forced to give it a try. Foreclosure was an option, but they live in a state that allows for a deficiency judgment, meaning they could be held responsible for the balance of the loan forever. The only other solution was bankruptcy, which they sought to avoid. Dutifully, they sent the signed agreement and the first modified payment to the lender by overnight mail in order to track its delivery.

The proof of delivery revealed that the first payment was received seven days before the due date. Six days later, Fred called to find out why the check hadn't cleared their bank. This time the lender was unusually rude and insisted that it didn't receive the check despite being given the tracking number. A very unpleasant exchange ensued, a supervisor was summoned and they managed to "find" the check which finally cleared on the due date.

All three payments have now been made, but the lender refuses to reveal what the final outcome will be. To date, Fred and Wilma have made 32 phone calls to the lender and have received seven in return. On those calls they have spoken to 37 people, two of them twice, and have sent seven faxes with duplicate information.

In December, the lender sold stock to pay back the funds it had taken from the government under the Troubled Asset Relief Program to the lender could eliminate any government interference with its bonus plans. Since then, the four top executives at the lender were granted $25 million in bonuses. Fred and Wilma wonder if their December check was "lost," because the bank no longer needed to play the TARP game and now has no real interest in modifying any loans.

This article was cowritten by Tommie Monez, CFP, MBA, a wealth advisor with Focus Wealth Management.

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