The Foreclosure Rescue Mirage
Fausto Ordoñez tells his story for what must be the 10th or the 15th time, but the edge in his voice is as fresh as if this were the first. It began near the end of 2007, as the Great Housing Crisis swept across the country and all but wiped out Ordoñez's real estate business in the Dallas-Fort Worth area. Unable to keep up with his mortgage payments, Ordoñez turned to his mortgage company, Texas-based Saxon Mortgage Services, looking for options to help him save his home. Yet more than a year later, as the crisis deepened and the federal government rolled out its multibillion-dollar homeowner relief initiative, Ordoñez’s fate was as unclear as ever—and his drawn-out negotiations with Saxon had turned into a nightmare.
By the time the Treasury Department unveiled the centerpiece of its foreclosure prevention efforts, the $75 billion Home Affordable Modification Program, or HAMP, in March 2009, Ordoñez had endured countless setbacks. Saxon had first told him to stop making mortgage payments in order to qualify for a modification, then attempted to foreclose on his home when he followed the company's instructions—the first of several foreclosure attempts by the company. As Ordoñez grew ever more desperate, he filled out the same paperwork on multiple occassions only to be told the company had lost it. Then, for an eight-month stretch, Saxon ceased contact with him altogether, no longer even sending him monthly bills. "It was one screwup of theirs after another," he says.
When HAMP was announced, it offered Ordoñez a glimmer of hope. But Saxon wouldn't modify his mortgage under the Obama administration's much touted program. So he took matters into his own hands, filing complaints with the offices of Sen. John Cornyn (R-Tex.) and the Texas attorney general and contacting CBS News with his story. That outside advocacy, Ordoñez insists, is the only thing that saved him: In late June, he finally got his government modification. By then he estimates he'd called Saxon more than a hundred times, lost more than $4,000 on deposits for moving companies and rental housing when it looked as if he’d lose his home, and saw his credit damaged after multiple foreclosure attempts.
Believe it or not, Ordoñez is one of the lucky ones. It wasn't easy, but he was able to take part in the government's program and keep his home. Thousands of struggling homeowners have been less fortunate, which raises serious questions about the efficacy of the administration's foreclosure rescue strategy. Interviews with homeowners, consumer advocates, attorneys, government officials, and lending experts all suggest that HAMP, now almost six months old, has struggled mightily to live up to its hype. Hundreds of pages of congressional testimony likewise detail the program’s flaws and shortcomings. And the numerous lawsuits filed against mortgage servicers participating in HAMP alleging shoddy lending practices suggest the companies the Treasury is relying on to execute HAMP may be ill suited to rescue struggling homeowners. Just the same, they are poised to receive millions—even billions—in taxpayer money for participating in the program.
Industry experts are now questioning how many of the program’s estimated 235,000 modifications will actually benefit homeowners in the long term, and say that homeowners clamoring to participate in HAMP have created an industrywide logjam for mortgage servicers, resulting in substantial delays and backed-up customer service support. The Treasury’s first servicer performance report (PDF), covering March to July 2009, found that servicers had offered modifications to just 15 percent of eligible delinquent homeowners, and initiated them for just 9 percent of that group. (And that total doesn't include homeowners who are less than 60 days delinquent or those with delinquency right around the corner, facing what's called "imminent default"—which means the percentage of HAMP modifications to date is surely even lower than 9 percent.)
Meanwhile, the fallout from the housing market’s stunning collapse continues to worsen. More than 360,000 foreclosures took place in July, a 7 percent increase from June and a 32 percent jump from a year ago, according to RealtyTrac. According to the Mortgage Bankers Association, 13 percent of mortgage loans were delinquent in the second quarter of 2009, the highest since the trade group began tracking the data in 1972. Lawmakers in Washington, including Sen. Dick Durbin (D-Ill.) and Rep. Barney Frank (D-Mass.), chairman of the powerful House financial services committee, have begun to voice doubts over whether HAMP servicers are doing enough to help homeowners. Now Frank and Durbin are revisiting the idea of allowing bankruptcy court judges to modify mortgage terms, an option called “cramdown” that the Senate rejected earlier this year. Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania who runs The Mortgage Professor website, is unflinching in his assessment of HAMP: “At this point, I would have to say it’s a failure.”
HAMP’s problems began before the program had a name. Racing to provide relief to ailing homeowners as foreclosures mounted, President Obama traveled in late February to Mesa, Arizona, the city with the fifth-highest foreclosure rate nationwide in 2008, to announce the government’s rescue plan. While short on details, this program, he told a packed crowd at Mesa’s Dobson High School, could help as many as 3 to 4 million homeowners. “By making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow—costs that are borne not just by families with troubled loans,” he explained, “but by their neighbors and communities and by our economy as a whole.”
Initial guidelines (PDF) for HAMP didn't emerge for several more weeks. But that didn’t stop struggling homeowners from flooding their mortgage companies, which largely lacked the capacity to handle the deluge. "Think of the mounds of paper coming in on a daily basis," says Joseph Smith II, president and CEO of Kentucky-based Default Mitigation Management, a private loan workout and negotiation company. "The rollout and everything else, it should never have been announced until the policies and procedures were in place."
In theory, HAMP works like this: Eligible borrowers, including homeowners behind on their payments or with a serious chance of default, apply for a program modification through their mortgage servicers—the companies that handle day-to-day responsibilities like taking payments, providing customer service, and foreclosing on those in default, but often don’t own the mortgage itself. If accepted, the homeowner’s monthly payments are lowered under HAMP terms, which say the new payments should not be more than 31 percent of the homeowner’s income. Servicers can lower payments by decreasing the interest rate, extending the term of the mortgage, or even forgiving part of the principal—the total amount owed. HAMP calls for a 90-day trial period for the new modification, and if the homeowner pays those three trial payments on time, the modification is finalized and extended over several years. For each successful HAMP modification, servicers receive a $1,000 incentive payment, and can earn $1,000 more each year (for up to three years) that borrowers stay in the program.
The problem is that the Obama administration gave mortgage servicers little more than a heads-up before rolling out its program, leaving companies to play catch-up once HAMP was announced. A vice president at Wells Fargo Home Mortgage, Mary Coffin, told the Senate banking committee in July that the percentage of loan workout inquiries from borrowers who are current increased from, on average, 5 to 10 percent a month to 40 percent since HAMP was implemented. Further complicating matters, the Treasury has continued to tweak the new program’s details while giving servicers little advance notice. “The current method of publicly announcing new guidelines or changes concurrently with their effective dates creates immediate demand with insufficient lead time for operational readiness,” Allen Jones, an executive for default management policy at Bank of America, testified to Congress in mid-July. “This can lead to negative customer experience and, ultimately, backlash against the programs.”
"Negative customer experience" is putting it mildly. One Connecticut woman described her ongoing struggle to modify her mortgage as her "worst nightmare." Simply getting someone on the phone who can help or who has any authority, homeowners say, can be a maddening endeavor. "I would call all the time, all the time," says Tangi Smith, a single mom living in Lake Worth, Florida, who's been trying to get a HAMP modification with CitiMortgage. "You just get this big circle jerk."
Kristina Page of Panama City, Florida, can relate. She realized earlier this year that her adjustable-rate mortgage would reset in August, and knew she’d struggle with the increased payments. Her husband had recently been laid off, and during that time, Page said, "we blew through our savings and had no money for a down payment for refinancing." An avid Daily Kos blogger and fan of the popular economics blog Calculated Risk, Page had been following the Obama administration’s homeowner relief efforts—which is why it struck her as somewhat strange when her company, also Saxon Mortgage Services, called her on the day HAMP was announced and offered her a modification of its own. The company offered to freeze her interest rate at around 10 percent with no reduction in payment or owed principal amount—a far worse deal than those brokered under HAMP. When she inquired about HAMP, Page recalls, the company said, "‘We haven’t heard anything about it.' I just thought, ‘You’re trying to scam me.'"
So Page kept making regular payments on her tan-colored ranch with the pool out back, the one that used to be her parents’ dream house. It wasn’t until she called Saxon again in June that the company offered her a HAMP modification. But several weeks after mailing in the required paperwork, a Saxon rep called to say the company hadn’t received anything—even though Page had tracked the package online and even knew the name of the employee who’d signed for it. The company has yet to find the original package, and Page has since sent Saxon another set of documents. She’s also filed a complaint with the office of the Special Inspector General for the Troubled Asset Relief Program. (Neil Barofsky, the Special Inspector General for TARP, told Mother Jones his office has received numerous complaints about mortgage servicers, and SIGTARP’s most recent report [PDF] says the watchdog has begun an audit of the government’s modification program.)
At least Page got a HAMP offer. Some mortgage servicers flatly refuse homeowners' HAMP modification requests and offer no explanation why, say consumer advocates and attorneys. And if making contact with a helpful employee is hard, learning why someone was rejected for HAMP can often prove impossible. "It is not unusual for the homeowner to get no notice that HAMP is unavailable other than to learn that the house is back on the sheriff sale list," Irwin Trauss, an attorney with Philadelphia Legal Assistance, which provides free legal services on foreclosure issues, told (PDF) a House subcommittee in early July.
HAMP’s failings can largely be attributed to flaws in its design, particularly when it comes to the government's guidelines determining which homeowners are eligible, what kind of modification they should receive, and even how the modification process is supposed to work. (The Treasury Department did not respond to multiple requests for comment.)
For instance, one HAMP guideline specifies that a mortgage payment can't be more than 31 percent of an individual or couple’s gross income. But gross income can be an imperfect measurement—it leaves out expenses that lenders should account for, like alimony, child support, and back taxes. A more effective program, says Joseph Smith, would use net income, the actual amount of money someone has at the end of the month. This measure, he explains, shows "the borrower has the ability to sustain the mortgage, pay living expenses, and has a reasonable likelihood of success. Anything short of that is an absolute disaster."
Then there's HAMP’s paperwork process. Lacking a standardized set of forms for all servicers, the program's servicers require their own sets of documents, complicating the process for third-party debt counselors, who assist homeowners trying to navigate pages of perplexing mortgage documents. "It’s a terrible hassle, and borrowers have problems understanding these forms and filling them out correctly," says the University of Pennsylvania's Guttentag. "The whole process would be enormously simplified if there was one master form."
The program also gives homeowners no fair warning about the damage HAMP can inflict on their credit. Guidelines published by the Consumer Data Industry Association that apply to HAMP say homeowners who enter the program’s trial period current on their mortgages should continue to be reported to credit bureaus as current but should also be reported as paying "under a partial payment agreement." An official with FICO, a private company that calculates credit scores, told Bloomberg that the firm views mortgage renegotiation as an indicator of greater risk even if the homeowner pays on time. Victor Stern of Charlotte, North Carolina, told the news service that his credit score dropped by 121 points, from 740 to 619, when he began HAMP’s trial period. "This program is helping with payments on one side," he said, "but then hurting your credit on the other, so you wind up behind the eight ball."
On the servicer side, another crucial calculation—how much a homeowner should pay—is just as flawed. HAMP guidelines permit servicers to take financial information over the phone for admission into the program’s three-month trial period without verifying it. While this surely speeds up the application process, it can also lead to homeowners, intentionally or not, giving incomplete or false information to get in. Once the trial period is up, however, homeowners must submit official documentation—and if that doesn’t match their trial period information, they could end up in an unaffordable modification or dumped out of the program altogether, landing them back in jeopardy of foreclosure. Experts and servicers alike believe the technology exists to both improve the application process and speed it up (like an online application portal for the entire program), but the Treasury has yet to implement such a measure, even though it could prevent taxpayer dollars from being squandered on failed modifications.
Between the Treasury, Fannie Mae, which administers HAMP, and Freddie Mac, which oversees compliance, program transparency and oversight are very much a work in progress. Six months in, HAMP officials have limited ability to monitor servicers and even less leverage to enforce program compliance if servicers aren’t following the rules, lending experts say.
An early safeguard should have been HAMP's "readiness reviews" of servicers looking to join the program. One bailout watchdog, the Congressional Oversight Panel, warned in March that servicers were understaffed, could barely handle pre-HAMP modification demand, and would struggle with the increased volume HAMP would create. Presumably, readiness reviews could have spotted these problems and helped servicers ramp up to meet HAMP's demand. Yet according to a recent Government Accountability Office report, the readiness reviews weren't used to evaluate servicers but merely to make sure the companies understood how the program worked. In other words, HAMP participants were barely vetted. Indeed, 20 of the 27 servicers in HAMP as of July 14 didn’t receive reviews at all, the GAO found.
"Because servicers are not fully evaluated during the admittance process, Treasury is unable to adequately identify, assess, and address any potential risks that may prevent them from fulfilling program requirements," the GAO concluded.
The companies partipating in HAMP include those with questionable track records, some the targets of numerous lawsuits. For instance, Ocwen Financial Corporation, which the Central Florida Better Business Bureau gives an "F" rating, is the subject of a class-action lawsuit alleging unlawful and deceptive business practices, like increasing monthly payments without notice, misapplying homeowners' payments, and failing to give homeowners payment-related information in a timely fashion. (An executive for Ocwen questioned the veracity of the lawsuit and the BBB’s grade, saying the Bureau’s rating system unfairly targeted large companies.)
Saxon, in particular, has been hit with a large number of complaints and lawsuits accusing the company of violating fair lending practices, predatory lending, and unfairly trying to foreclose on homeowners. The Fort Worth, Texas, BBB gives Saxon a "D" rating, and more than 500 consumer complaints have been filed with the Bureau in the past three years. (Saxon declined an interview request and to respond to written questions. A spokesperson said in a statement that the company "has invested and will continue to invest the necessary amount of resources to effectively execute the Obama Administration's HAMP program" and remains "committed to exceptional service to all of our customers.") The company's business practices have even inspired a website, SaxonWatch.com, devoted to anecdotes and scathing testimonials about the servicer.
Stories, that is, like Steve Jeczala’s. A resident of Spokane, Washington, Jeczala is currently trying to obtain a Saxon modification for his cancer-stricken sister. She was rejected for a HAMP modification, he says, on the basis of her income, a patchwork of disability payments, monthly support from a cancer patient center, and $700 or so out of Jeczala’s pocket. Like Ordoñez and Page, he’s sent in application materials multiple times only to have them lost in the shuffle. "It seems like Saxon just wants her home," he says, "which is fine—they can have her home. At least let her die in it."
Despite its flaws, HAMP is a good-faith effort by the government to address the foreclosure crisis, and there are signs of improvement. In June, HAMP officials began conducting much more rigorous reviews of servicers, and have started a "second look" program, in which servicers’ decisions to approve or deny HAMP modifications are scrutinized. Compliance officials are also analyzing samples of HAMP-modified loans to track error rates with servicers. And government officials have on several occasions tried to light a fire under HAMP servicers to speed up the modification process. On July 9, Treasury Secretary Tim Geithner and Department of Housing and Urban Development Secretary Shaun Donovan sent a letter to servicers exhorting them to move faster with modifications. Several weeks later, servicers’ representatives met with Obama administration officials in Washington to talk about boosting modifications.
Servicers, to some extent, have gotten the message, as many of them have upgraded their capacities and expanded their staffs to meet the rapidly growing demand. To handle more activity, Saxon added an additional shift, The Wall Street Journal reported in mid-July, while upgrading document-scanning technology and increasing training for employees. Coffin, the Wells Fargo executive, told the Senate banking committee that her company had increased trained staff dealing with mortgage servicing by more than 50 percent, and implemented mandatory overtime, among other changes. Chase Home Finance and CitiMortgage have also increased staffing levels, along with retraining employees to deal with HAMP inquiries and modifications.
But even with improvements, it’s doubtful whether HAMP will ever match expectations and slow foreclosure rates, experts say. The Treasury has set a target of modifying 4 million mortgages by 2012, but Moody's estimates HAMP will in fact modify only 1.5 to 2 million. (For perspective, Goldman Sachs projects there will be 13 million foreclosures from 2009 through 2014.) And a Moody's analyst recently wrote that the program "will have to step up substantially in the remainder of this year in order" to meet even that total. Consumer advocates and attorneys throughout the country say some of the servicers with whom they’ve interacted often seem outright reluctant to modify loans. And mortgage experts largely agree that cramdown measures must be used to put a dent in the deepening crisis. "It is clear...that this new voluntary, incentives-based program will not and cannot achieve the necessary degree of foreclosure prevention and mortgage debt reduction that are essential prerequisites to an economic recovery," Alan White, a bankruptcy law expert and law professor at Valparaiso University who's studied the mortgage industry, told Congress in July.
Homeowners, in the meantime, are left to wait to see. About a month after first talking to Mother Jones, Kristina Page remains in limbo with Saxon. The company is still tracking down her application paperwork, while at the same time peppering her with automated phone calls saying her mortgage is delinquent. She is, quite simply, at a loss. "My goodness, is this what we really should have to go through?" she asks. "Is this what the president intended for this program?"