Monday, September 6, 2010

Loan modification program in Phoenix helps fewer than expected

A year and a half after it began, the federal government's loan-modification program is helping fewer homeowners facing foreclosure than hoped.

Of the Phoenix-area borrowers who sought lower monthly payments through the Home Affordable Mortgage Program in April, more than half, about 10,000, left the program by the end of July without having had their payments permanently lowered. April is the first month for which complete data is available.

Some of those borrowers did receive help from other programs, including federal incentives for short sales, in which lenders agree to let owners sell their homes for less than they owe, avoiding foreclosure. But many other homeowners were denied permanent modifications after making several months of "trial" payments and have lost their homes to foreclosure or may soon.

Some housing advocates say too many homeowners were strung along with trial loan modifications under the government's program, known as HAMP, when the lender knew a foreclosure was inevitable.

Lenders defend their trial modifications, saying they didn't know all of the rules for the new federal program when it was announced, so they placed many homeowners in temporary modifications to help them avoid imminent foreclosure.

It is also possible some of those borrowers simply didn't meet the program's complex requirements, even though they were approved for a trial modification.

Lenders won't comment on specific borrowers' cases, and the Treasury Department hasn't released a list of borrowers who had their trial modifications canceled. So it is impossible to know why homeowners are being denied permanent mortgage adjustments.

"It's disappointing we haven't been able to keep more people in their homes with HAMP loan modifications," said Patricia Garcia Duarte, president of the non-profit Neighborhood Housing Services of Phoenix. "We need to find out the reasons behind the canceled trial loan modifications."

She said there are homeowners denied modifications through the Home Affordable Mortgage Program who are being approved for other foreclosure-prevention alternatives from lenders, including short sales and other types of loan modifications.

Modification program

The Obama administration rolled out the loan-modification program in April 2009.

The idea was to encourage lenders to reduce monthly payment amounts for overextended borrowers. The lenders could reduce interest rates to push down the monthly cost. They could lengthen the terms of the loan, stretching the amount owed over more years and therefore making each payment smaller. They also could simply forgive some of the principal, helping borrowers lower their payments because they would owe less.

The program allowed lenders to give borrowers a modified payment on a trial basis for three to six months while they finalized the applications. For each successful modification, the government would pay lenders $1,500 to $3,500.

The government's plan called for reducing payments to no more than 31 percent of the incomes of homeowners in need.

Thousands of homeowners in metro Phoenix rushed to apply.

To tackle the huge first wave of applicants, lenders gathered basic financial information from homeowners and put many on temporary payments. On average, the new payments nationwide were $500 lower than borrowers' old payments. Homeowners were told if they made their trial payments and submitted all the necessary paperwork, their loan modifications would be made permanent.

But there were catches to the new federal program that weren't initially clear to many who applied. Borrowers had to prove to lenders they had lost income - from a job loss, for example - but still earned enough to afford the reduced payment. All trial payments had to be made on time.

Principal rarely cut

Also, though lenders were encouraged by the federal government to cut borrowers' loan amounts, that practice isn't common. So far, most lenders offer only reduced interest rates or longer-term mortgages.

Progress in making permanent modifications proved slow.

The Treasury Department began releasing complete data on applicants for loan modifications after the program's first year.

At the end of April 2010, almost 25,000 homeowners had been given trial modifications, pending their applications for permanent help.

In June, the Treasury Department urged lenders to catch up on processing those applications.

But by the end of July, about 10,000 of those applicants had left the system without a modification, presumably rejected by their lenders, though federal officials have not released details of the cancellations for the Phoenix area.

Nationwide, cancellations far outpaced new permanent loan modifications in July. Nearly 150,000 U.S. trial modifications were canceled while 37,000 modifications were made permanent.

One woman's story

Ramona Aceves had made four months of trial payments when her lender told her she didn't qualify and canceled her temporary modification in May.

Her lender then required her to make up the difference between her lower payment and her regular payment during the time she was in the trial period, about $1,500. Aceves said she has been able to keep her Phoenix home only by borrowing money from her family to repay her lender the lump sum and keep up with her monthly payments.

Aceves said she wouldn't have accepted the trial loan modification if she had known how it was going to end.

Homeowner advocates are critical of how banks handle cases such as Aceves'.

"A lender knows fairly quickly through the HAMP formula whether a client will qualify. But the lender is getting paid and doesn't have to start spending legal fees yet to go through the foreclosure process," said John Smith, president of Housing Our Communities, an Arizona non-profit that provides foreclosure-prevention counseling.

"So a lot of people are in trial mods for months not knowing," he said. "The lender knows they are just postponing the inevitable."

The Treasury Department says lenders attribute most of the cancellations to borrowers missing payments or not providing enough documentation to support their appeal for lower payments.

Joe Rodriguez applied to modify the mortgage on his Phoenix home in June 2009.

"I have been making my modified payment for several months, but I keep receiving requests from my lender for more documentation," said Rodriguez, who lost his job of 13 years in 2009. "They wanted my divorce decree, and I have never been married. Then they wanted proof I am a resident, and I was born here."

Rodriguez said his lender called last week and told him the modification was canceled because he hadn't submitted his divorce papers. He made his modified payment anyway and is working on his fourth letter explaining to his lender he has never been married.

Feds' apply pressure

Recognizing that the payment-modification program isn't helping as many homeowners as expected, the federal government is pressuring lenders to enroll more struggling homeowners.

At the end of July, 3.1 million homeowners were eligible, according to Treasury estimates, and 435,000 permanent loan modifications had been made by lenders.

But cancellations are expected to outpace permanent modifications in August as well, the Treasury reports.

"Currently, servicers are working through their pending modifications," said Treasury assistant secretary for financial stability Herb Allison in the July report on HAMP. "While Making Home Affordable works for a number of homeowners, many others are offered other means of avoiding foreclosure."

New effort launched

To help homeowners who haven't been able to obtain a loan modification, the federal government launched another program in March called Help for the Hardest Hit Housing Market.

Arizona is receiving $125 million, and most of the money will go toward loan modifications.

The program is different from HAMP. It specifically calls for lenders to reduce the amount borrowers owe, by giving homeowners cash to pay down principal if the lender agrees to forgive an equal amount.

State officials say the help is crucial.

"We are on track for 50,000 foreclosures in the Valley this year," said Michael Trailor, director of the Arizona Housing Department, which is administering the funds.

But even if it works, the aid will reach far fewer borrowers than those who sought loan modifications through the earlier federal program. Trailor said the agency hopes to help 4,000 homeowners.

The Housing Department is expected to start taking applications for its new loan-modification program this month.

by Catherine Reagor The Arizona Republic Sept. 5, 2010 12:00 AM

Loan modification program in Phoenix helps fewer than expected

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