Homeowners and government watchdogs agree: The much-vaunted Home Affordable Modification Program (HAMP) has so far been a failure. Likewise, the mortgage servicing companies charged with implementing the program aren't too happy with it either. But do servicers' complaints have merit? Or are they improperly and deliberately denying HAMP claims?
When the country's largest mortgage servicers testified before the House of Representatives in June about the HAMP program and the results they have achieved thus far, they explained that the disappointing performance of the program is the result of its complexity, many changes and borrower failure to provide needed information or make their trial payments on time.
How many loan mods?
Of the millions who have applied for HAMP in the 15 months the program has been up and running, less than 400,000 have received permanent loan modifications -- a far cry from the three million to four million people the Treasury Department projected would be helped by the program.
Wells Fargo co-president Michael J. Heid said that many borrowers expecting a mortgage modification ultimately didn't qualify. He added that a lack of income documentation and failure to make all of the trial modification payments were the primary reasons some borrowers failed to receive a permanent modification.
He indicated that the program's ongoing evolution makes it hard for mortgage servicers to catch up. "This has contributed to a level of complexity that has been difficult for customers to understand and for servicers to communicate and execute," he said.
Treasury officials added that only one in 10 borrowers kicked out of HAMP heads into foreclosure. About half are offered relief from other lender interventions. However, it's unclear how helpful those proprietary loan modifications are, or how they will perform in the long run. While permanent modifications give borrowers an average savings of $510 per month, the government does not track what sort of savings borrowers can expect from non-HAMP modifications, and critics say servicers push desperate borrowers into packages that aren't in their best interest, in many cases increasing their payment to repay arrearages.
Loan modification hell
While some homeowners may have failed to qualify for a modification for the reasons indicated by Heid, many others have come forward with remarkably similar stories: lost paperwork, requests to fax the same documentation over and over, speaking with a different mortgage modification specialist every time, and a perceived sense of both indifference and incompetence on the part of the servicer.
Ultimately, most faced denials for HAMP and demands for immediate payment even when they met every qualification listed on MakingHomeAffordable.gov. The frustration and heartache of mortgage customers has been extensively documented on sites like ConsumerAffairs.com.
One problem may be the least understood part of the process, the Net Present Value, or NPV, test. This test is not applied the same way from lender to lender, so a homeowner who passes it with one lender may fail it with another. The test's purpose is to allow lenders to determine if they would lose less money by foreclosing than by modifying your loan. If they would, then they don't have to modify your mortgage and may instead elect to foreclose. So borrowers who are not underwater are far less likely to be offered mortgage modifications, no matter what their hardship is.
Watchdogs are barking
A report from the Government Accountability Office (GAO) found that large servicers were not applying HAMP guidelines properly or consistently. For instance, half the servicers studied had a 20 percent error rate when calculating borrower income. Since income-to-housing expense is one of the key qualifications for HAMP applications, the GAO noted that this miscalculation alone could deny thousands of qualified homeowners HAMP relief.
Mortgage servicers, investors and borrowers: Is there a conflict of interest?
But it gets more complicated than that. Even when the owners of the mortgage may be better served by a loan modification than they would by a foreclosure, the servicers that collect payments, send out statements and modify or foreclose on the loans might have a different agenda.
"In many cases, the servicers can continue to make more money if the family goes through foreclosure," Elizabeth Warren, chairwoman of the Congressional Oversight Panel for the bailout and special adviser to the new Consumer Financial Protection Bureau said. "It's just not a program that's working for homeowners. It's not a program in some cases that's working for investors. And most importantly, it's not a program that's working for the economy over all."
Others agree. Glenn Russell, a Massachusetts real estate attorney said in a Business Week article that once a loan is 90 days or more overdue, servicers hit borrowers with appraisal, processing, attorney and foreclosure fees. Then there are the monthly late fees that can run as high as 5 percent of the mortgage payment. A foreclosure on a $200,000 mortgage can generate $10,000 or more in income for servicers, who get paid before mortgage investors. Meanwhile, HAMP offers the servicers a paltry $1,000 for every mortgage modified.
"Servicers can easily make 10 times any of the government stipends being offered by simply foreclosing on the house," Russell said. "The mortgage investors will take a loss from a foreclosure or a short sale, but not the servicers who are first in line to be paid from the proceeds of the sale."