WASHINGTON - Ten months after the Obama administration began pressing lenders to do more to prevent foreclosures, many struggling homeowners are holding up their end of the bargain but still find themselves rejected, and some are even having their homes sold out from under them without notice.
These borrowers, rich and poor, completed trial modifications of their distressed mortgage, and made all the payments, only to learn, often indirectly, that they won't get help after all.
How many is hard to tell. Lenders participating in the administration's Home Affordable Modification Program, or HAMP, still don't provide the government with information about who's rejected and why.
To date, more than 759,000 trial loan modifications have been started, but just 31,382 have been converted to permanent new loans. That's averages out to 4 percent, far below the 75 percent conversion rate President Barack Obama has said he seeks.
In the fine print of the form homeowners fill out to apply for Obama's program, which lowers monthly payments for three months while the lender decides whether to provide permanent relief, borrowers must waive important notification rights.
This clause allows banks to reject borrowers without any written notification and move straight to auctioning off their homes without any warning.
That's what happened to Evangelina Flores, the owner of a modest 902 square-foot home in Fontana, Calif. She completed a three-month trial modification, and made the last of the agreed upon monthly payments of $1,134.60 on Nov. 1. Her lawyer said that in late November, Central Mortgage Company told her that it would void her adjustable-rate mortgage, which had risen to a monthly sum above $2,000, and replace it with a fixed-rate mortgage.
"The information they had given us is that she had qualified and that she would be getting her notice of modification in the first week of December," said George Bosch, the legal administrator for the law firm of Edward Lopez and Rick Gaxiola, which is handling Flores' case for free.
Flores, 58, a self-employed child care worker, wired her December payment to Central Mortgage Company on Nov. 30, thinking that her prayers had been answered. A day later, there was a loud, aggressive knock on her door.
Thinking a relative was playing a prank, she opened her front door to find two strangers handing her an eviction notice.
"They arrived real demanding, saying that they were the owners," recalled Flores. "I have high blood pressure, and I felt awful."
Court documents show that her house had been sold that very morning to a recently created company, Shark Investments. The men told Flores she had to be out within three days. The eviction notice had a scribbled signature, and under the signature was the name of attorney John Bouzane.
A representative in his office denied that Bouzane's law firm was involved in Flores' eviction, and said the eviction notice was obtained from Bouzane's Web site, www.fastevictionservice.com.
Why would a lawyer provide for free a document that gives the impression that his law firm is behind an eviction?
"We hope to get the eviction business," said the woman, who didn't identify herself.
Flores bought her home in 2006 for $352,000. Records show that it has a current fair-market value of $99,000. The new owner bought it for $78,000 at an auction Flores didn't even know about.
"I had my dream, but now I feel awful," said Flores, who remains in the house while her lawyers fight her eviction. "I still can't believe it."
How could Flores go so quickly from getting government help to having her home owned by Shark Investment? The answer is in the fine print of standard HAMP documents.
The Aug. 25 cover letter from Central Mortgage Company, the servicer that collects Flores' mortgage payments, offered Flores a trial modification with this comforting language:
"If you do not qualify for a loan modification, we will work with you to explore other options available to help you keep your home or ease your transition into a new home."
CMC is owned by Arkansas regional Arvest Bank, itself controlled by Jim Walton, the youngest son of Wal-Mart founder Sam Walton.
A glance past CMC's hopeful promise finds a different story in the fine print of HAMP document, which contains standardized language drafted by the Obama Treasury Department and is used uniformly by lenders.
The document warns that foreclosure "may be immediately resumed from the point at which it was suspended if this plan terminates, and no new notice of default, notice of intent to accelerate, notice of acceleration, or similar notice will be necessary to continue the foreclosure action, all rights to such notices being hereby waived to the extent permitted by applicable law."
This means that even when a borrower makes all the trial payments, a lender can put the house up for auction if it decides that the homeowner doesn't qualify - assuming that foreclosure proceedings had been started before the trial period - without telling the homeowner.
Until now, lenders haven't even had to notify borrowers in writing that they'd been rejected for permanent modifications.
In January, 11 months after Obama's plan was announced, homeowners will begin receiving written rejection notices, and the Treasury Department finally will begin receiving data on rejection rates and reasons for rejections.
The controversial clause notwithstanding, the handling of Flores' loan raises questions.
"Foreclosure actions may not be initiated or restarted until the borrower has failed the trial period and the borrower has been considered and found ineligible for other available foreclosure prevention options," said Meg Reilly, a Treasury spokeswoman. "Servicers who continue with foreclosure sales are considered non-compliant."
CMC officials declined to comment and hung up when they learned that a reporter was listening in with permission from Flores' legal team. Arvest officials also declined comment.
McClatchy did hear from Freddie Mac, the mortgage finance agency seized by the Bush administration in September 2008. Freddie owns Flores' loan, and spokesman Brad German insisted that Flores was reviewed three times for loan modification.
"In each instance, there was a lack of documentation verifying that she had the income required for a permanent modification," German said.
That response is ironic, said Michael Calhoun, the president of the Center for Responsible Lending, a nonpartisan group in Durham, N.C., that works on behalf of borrowers.
"These lenders gave loans with no documentation and charged them a penalty interest rate for doing so. And now when the people ask for help, they are using extravagant demands for documentation to give them the back of their hand and continue to foreclosure," Calhoun said.
German said that Flores was sent a letter on Nov. 24, which would have arrived several days later, given the Thanksgiving holiday, informing her that she'd been rejected for a permanent modification. Flores and her attorney said she never got a letter, and neither Freddie Mac nor CMC provided proof of that letter.
Exactly one week after the letter supposedly was sent, Flores' home was sold to Shark Investments. That company was formed on Aug. 19, according to records on the California Secretary of State's Web site. Shark Investments, apparently an unsuspecting beneficiary of Flores' woes, has no phone listing. The Riverside, Calif., address on the company's filing as a limited liability company traces to a five-bedroom, four-bath house with a swimming pool.
German didn't comment on whether Flores received sufficient notice under Freddie Mac rules, or how the home could move to sale so quickly.
Flores' legal team, which specializes in foreclosure prevention, thinks that lenders and servicers are gaming Obama's housing effort.
"It seems servicers are giving people false hopes by sending them a plan, and they are using the program as a collection method, getting people to pay them with no intention of modifying the loan," said Bosch. "I believe they are using this as a tool to suck people dry."
Dashed hopes aren't exclusive to the working poor such as Flores.
David Smith owns a beautiful home in San Clemente, Calif., the location of the Richard Nixon Presidential Library. Smith purchased his five bedroom home four years ago for $1.3 million. Today, the real estate Web site Zillow.com estimates the value of Smith's home at $981,000, slightly below the $1 million he still owes on it.
Smith said he went from "making a lot of money to making hardly any" as the national and California economies plunged into deep recession. He's a salesman serving the hard-hit residential and commercial construction sector. On top of his hardship, Smith's mortgage exceeds the limits for the HAMP plan.
In late August, Smith signed and returned paperwork in a prepaid FedEx envelope to Bank of America that said it had received the contract needed to modify the adjustable-rate mortgage he originally took out with the disgraced lender Countrywide Financial, which Bank of America bought last year.
The modification agreement shows that Bank of America agreed to give Smith a 3.375 percent mortgage rate through September 2014, and everything Smith paid between now and through 2019 would count as paying off interest. He'd begin paying principal and interest in October 2019, with the loan maturing in 2037.
The deal favors the lender, but Smith, 55, jumped on it because it kept him in the home.
Armed with what he thought was "a permanent modification," Smith returned a notarized copy of the agreement and made subsequent payments on time.
In return, he got a surprising notice from Bank of America saying that his house would be auctioned off on Dec. 18.
"It looks like they're trying to sell this out from underneath me," Smith said. "My wife cries all the time."
After a Dec. 16 call from McClatchy asking why Bank of America wasn't honoring its own modification, the lender backed off.
"The case has been returned to a workout status and a Home Retention Division associate will be contacting Mr. Smith for further discussions," said Rick Simon, a Bank of America spokesman. "The scheduled foreclosure sale will be postponed for at least 30 days to allow for review of the account in hope of completing a home retention solution for Mr. Smith."
The Center for Responsible Lending says such problems are common.
"Everyone acknowledges that the system is not working well," Calhoun said.