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One Family’s 9-Month Trip Through the Loan Mod Twilight Zone

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A Nationwide Failure

HousingBubble_Dharmesh_Patel_CCFlickrThe Beckages are among hundreds of thousands of Americans who applied to their lenders for help from the federal program, only to be denied. Part of the problem, consumer advocates say, is that banks only know how to do two things: Write mortgages, and foreclose on mortgages. Most simply lack the computer systems and the trained personnel capable of doing anything else.

“Their business model is completely wrong, and is not suited for the current environment,” says Marks, whose group runs its own, large-scale loan modification program (known in the industry as “loss-mitigation”).

Wells Fargo runs the third-largest loan modification operation in the country, after Bank of America and JP Morgan Chase, according to data collected by Pro Publica, a nonprofit investigative journalism group. Wells has started 215,718 modifications since the HAMP program started. More than half, 54.8%, ended while they were still in the trial stage. Only 34.5% became permanent, Pro Publica found. That’s a little worse than nationwide averages, in which 49.6% of the total 1.5 million modifications failed during the trial phase, and 36.1% became permanent. People in Beckage’s situation, who were denied even for trial modifications, do not appear in these numbers.

This failure by servicers and the HAMP program to make permanent changes to modifications has frustrated many homeowners, as well as the watchdog agency in charge of monitoring HAMP’s progress.

“(T)he number of homeowners being helped through permanent modifications remains anemic,” according to a report by the Office of the Inspector General for the Troubled Asset Relief Program, which includes HAMP.  “HAMP has not put an appreciable dent in foreclosure filings. Indeed, the number of trial and permanent modifications that have been cancelled substantially exceeds the number of homeowners helped through permanent modifications.”

The other problem is with loan servicers. These days most mortgages aren’t kept by the bank that makes the original loan. Instead, thousands of mortgages are bundled up and sold as a package to investors. Those investors employ loan servicing companies to do the grunt work, like opening envelopes from homeowners and making sure the taxes and insurance get paid.

As previously covered here and here on Credit.com, the problem with this system is that the financial interests of loan servicers often conflict with those of homeowners and investors. If a home goes into a foreclosure, servicers are guaranteed by law to get paid first when the house is eventually resold. If the mortgage is modified, however, servicers have no such guarantee, and their income as a percentage of total mortgage payments goes down.

[Related articles: For Mortgage Servicers, the Day of Reckoning Is Nigh and HAMP Fails to Save Homeowners from Foreclosure]

So instead of giving loan modifications, many servicers push homeowners into foreclosure prematurely, and keep them in foreclosure for long periods of time, increasing the amount of money they can rack up in maintenance fees and other charges, according to the Center for Responsible Lending.

“(A)though lenders suffer significant losses in foreclosures, servicers can turn a substantial profit from foreclosure-related fees,” according to a Congressional Oversight Panel report on the HAMP program. “As such, it may be in the servicer’s interest to move a delinquent loan to foreclosure as soon as possible.”

That’s one of the major reasons why HAMP failed, the report found. The program relied entirely on subsidies to encourage servicers to modify loans. But the subsidies aren’t big enough to outweigh the profits servicers make from foreclosures. And without any rule making participation in HAMP mandatory, many servicers simply decided it was in their business interest to continue handing out foreclosures instead of modifications, the study found.

The largest servicing companies are owned by the largest banks. Wells Fargo runs one of the largest servicing operations in the country, and its servicing arm is in charge of handling Beckage’s loan for the private investors who own it, Menke says. Her case fits the national trend: A rapid attempt at foreclosure, followed by a long and complicated attempt at modification.

Some consumer advocates say that increased regulation of servicing industry would change that.

“Over the past year, we have witnessed the spectacular failure of the servicing industry,” Julia Gordon, senior policy counsel with the Center for Responsible Lending, said in Congressional testimony. “The time has come to require loan servicers to engage in loss mitigation prior to foreclosure.”

Girding Up to Fight Some More »

Image: Dharmesh Patel, via Flickr.com

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