Watchdog to Challenge Foreclosures

Lender secrecy in US loan modification program assailed

by Christopher Snowbeck

A public interest group in St. Paul is filing a class action lawsuit to halt foreclosures until the federal government fixes problems with a mortgage modification program.

The lawsuit, which is expected to be filed in federal district court, challenges an Obama administration program established earlier this year to give mortgage lenders incentives to modify home loans for struggling borrowers.

While it is intended to prevent foreclosures where possible, the government program isn't working in some cases because homeowners aren't receiving proper notice, and don't have a guaranteed right to appeal decisions, St. Paul-based Foreclosure Relief Law Project plans to argue in its lawsuit.

"The government's loan modification program lacks transparency and accountability," said Mark Ireland, supervising attorney on the case. "The government does not require its loan servicers to tell a homeowner the specific reason why they have been denied a loan modification. Decisions are made under a cloak of secrecy, and there is no formal way to challenge these decisions."

The local group said its concerns echo some of those raised last week by a report from the U.S. Government Accountability Office, which reviewed the government's $50 billion Home Affordable Modification Program. Among other findings, the GAO said it was unclear when the program would have a comprehensive process in place to make sure that mortgage service companies evaluate whether borrowers who are in imminent danger of default might quality for the program.

Foreclosures rates have exploded in recent years because of a variety of factors - from subprime borrowers failing to make payments on "exotic" mortgage products, to homeowners pushed to the brink by the loss of jobs and income. The result has been a flood of foreclosed properties on the housing market - a surge that has torpedoed median sale prices in the Twin Cities and across the country.

When the administration's plans to combat the foreclosure crisis were unveiled in February and March, local housing experts were cautiously optimistic those plans could stem the tide.

But Ireland said that one plaintiff in his lawsuit has not been able to get a response from her mortgage service company about whether she is eligible for the government program. In another case, a homeowner lost his home even though he should have received a modification with help from the government, Ireland said.

"A federal program can't be administered arbitrarily," he said.

The lawsuit is modeled after similar cases filed in the early 1980s, which sought to stop foreclosures until the government ensured that due process rights were not violated when administering a program to prevent farm foreclosures. Those lawsuits were successful, Ireland said.

The current lawsuit applies to approximately 85 percent of all mortgage loans in the state, Ireland said. It will name as defendants the U.S. treasury secretary, the Treasury Department, the Federal Housing Finance Agency and home mortgage giants Fannie Mae and Freddie Mac, he said.