Obama Administration’s Home Affordable Modification Program Is, Well, Not So Affordable
3/8/2010
Source: By Casey Godwin, NewsMagazineNetwork.com

When the Obama Administration introduced a comprehensive financial stability plan, with the key component known as the Home Affordable Modification Program (HAMP), last spring, many homeowners in financial strife saw an opportunity to save their homes from possible foreclosure while getting back on their feet.

Donise Reitz, of Ballwin, was one such homeowner. A single mother, she was just another person feeling the pinch of a downturn in the economy. In 2008, she lost one of her part-time jobs and the business that was renting a forklift she owned closed, meaning an additional loss of income for the Reitz family. Suddenly, Reitz, who had prided herself with always maintaining perfect credit and being able to afford her home that she bought in 2006, was relying on savings and credit cards to get by.

After learning about HAMP, Reitz contacted her mortgage company, Nationstar, to find out if she would be eligible for the program. She filled out all the necessary documents and provided all the information that Nationstar requested and soon learned she had qualified to participate in a four-month trial period that could lead to permanent modification through HAMP.

She was sent a letter from Nationstar that outlined her trial period; the modified payment, which was a fourth of her normal mortgage payment; and when each payment was due. In bold letters, the document read, “These payments should be sent instead of, not in addition to, your normal monthly mortgage payment.” It also stated that “if the trial period payments are made in amounts different from the amount stated, your loan may not be modified.”

“From the very beginning I asked them specifically, ‘will this affect my credit?’,” Reitz said. “They assured me over and over again this would never affect my credit as long as I was current when I went into the trial period and as long as I made my payments on time.”

However, that is not what happened. Three months into the trial period, Reitz decided to buy out the lease on her car. She was shocked when the loan application was rejected. Soon after, Reitz learned that one credit card company dropped her and another lowered her credit line. When she asked the credit card companies what was going on, she was told that she had severe delinquency reported on her credit report by Nationstar. Nationstar was reporting that Reitz was only making partial house payments.

“I got a demand letter from Nationstar and they told me to disregard that,” Reitz said. “They again said it was not affecting my credit.”

Furthermore, the trial period was extended by two months and almost every time Reitz would call Nationstar, she was told she had not sent in needed documents yet, such as pay stubs and a financial statement.

“No one ever called me to tell me they needed this,” Reitz said. “I wonder what would have happened if I had not called them.”

After four months in the trial period and learning that her credit was being impacted, Reitz began making her full payments again despite being told of the extension. In January, she was called and told that she had not been accepted into the program and soon after, she was sent a demand letter for more than $8,000. This amount, which was the equivalent of the difference in amounts between her normal mortgage payment and the modified payment for four months, was due immediately in order to avoid foreclosure.

“Now I’m stuck with a 7 ? percent interest rate because I can’t refinance, I have poor credit, and I really don’t know what else is to come,” Reitz said. “I wish I had never, ever done this.”

Unfortunately, Reitz is far from alone.

In late 2009, the National Consumer Law Center (NCLC) and the National Association of Consumer Advocates (NACA) conducted a survey of 113 NACA members from 24 states about the prevalence of foreclosure sales in violation of HAMP. Almost 95 percent of those consumer advocates were representing homeowners in cases where the servicer attempted to proceed with a foreclosure sale without a completed HAMP review. Most of those advocates were representing dozens of homeowners in such cases.

The results of the survey clearly showed that servicers were not abiding by the current HAMP policy on stopping foreclosure sales.

Homeowners that enter HAMP must first go through a trial period, which is supposed to last only three months. A homeowner must complete an initial eligibility evaluation so that it can be determined whether or not the homeowner qualifies.

“The first step involves publicly available and easily applicable criteria; the second is subject to the servicer’s determination with incomplete disclosure to homeowners,” said Ellen Taverna, a legislative associate with NACA.

The eligibility criteria for trial modification are outlined on the program’s Web site (makinghomeaffordable.gov). These rules include owing equal to or less than $729,750 on a first mortgage and hardships such as an increase in mortgage payment or reduction of income. Those who meet the qualifications and are approved would have their mortgage payments reduced to 31 percent of the current gross income.

“The servicer is supposed to review what its contracts with the investors say and run what's called a ‘net present value’ test to determine if the investor will make more money under the terms of a proposed modification or if it doesn’t, proceed with a modification,” Taverna said. “(The U.S. Department of Treasury) has not made public the net present value test and the servicer does not need to tell the homeowner what all of the inputs it used were.”

According to the Department of Treasury, January data shows that more than 1 million homeowners have started trial modifications, but only 116,000 have received permanent modifications.

The guidelines to be accepted into the trial period are the same as those for permanent modification. While it seems those accepted into the trial period need only follow the rules to then be accepted for permanent modification, servicers are not making the leap an easy one.

“In our experience, many of the people who are denied permanent modifications are denied because the servicer has lost submitted documentation or has made a new determination, on no apparent basis, that the homeowner no longer qualifies,” Taverna said. “Because there is no public, servicer-by-servicer reporting of the reasons for denials at the permanent modification stage, it is hard to know for sure what is going on.”

Those who are dumped out of the program find that they owe the difference between the reduced payment of the trial period and their regular mortgage amount in one lump sum, often with the threat of foreclosure if prompt payment is not received. In the event of receiving permanent modification, that amount is added to their principal balance.

“The problem is made worse because servicers have taken far longer than the trial period of three months to approve or deny the permanent modification,” Taverna said.

Despite what Reitz was told, Taverna said entering the trial modification period can have significant impacts on credit.

“Even if someone was current upon entering the trial modification, they are no longer reported as current during the trial period, but as making payments under a plan – which is a significant detriment to credit,” Taverna said.

Taverna said that some homeowners have not been told of the impact on their credit and that servicers are being silent on the issue.

Nationstar declined to comment regarding Reitz’s situation.

“Without an attorney or housing counselor, some homeowners may not understand the full impact,” Taverna said.

Reitz said she was fortunate that when Nationstar demanded more than $8,000 to prevent foreclosure at the end of the trial period, she was able to come up with the money.

“I know there have to be a lot of people who would go into this thinking they were helping themselves and then not be able to pay that large of an amount and then lose their house,” Reitz said.

Reitz contacted a lawyer, but was told it would cost too much to fight Nationstar. And unless Nationstar officials will make efforts to remedy the damage to her credit, Reitz is stuck with a damaged credit report.

Taverna warned that all homeowners need to be aware of what the potential damage to credit entering into the trial period could mean.

“A trial modification will actually harm their credit,” Taverna said. “There are even examples of servicers mistakenly reporting that homeowners are delinquent on two accounts.”

Taverna said that homeowners who feel they have been wronged by the services not abiding by HAMP rules should seek legal assistance from an attorney focused on foreclosure prevention issues. NACA manages the Institute for Foreclosure Legal Assistance, which is a not-for-profit program that has enabled more than 35 organizations in 28 states to hire attorneys to represent homeowners facing foreclosure. Information on that program can be obtained at foreclosurelegalassistance.org.