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Homeowners Say Banks Not Following Rules for Loan Modifications

Paul Kiel

Nathan Reynolds is something of an expert on the government's
foreclosure prevention program. A mortgage broker who's worked in the
Chicago area since 1998, he's seen both his business and his home's
value plummet in the past few years. After receiving his own trial loan
modification from JPMorgan Chase, he's helped others apply for
modifications through the program on his own time.

But in
November, after Reynolds had made trial loan payments for seven months,
Chase told him his mortgage would not be permanently modified. Chase
had determined that his personal financial troubles were only temporary
- because Reynolds had expressed optimism that the administration's
policies might rescue the housing market, boosting his income.

not a legitimate reason for a loan servicer to deny someone's
modification, according to the Treasury Department's guidelines for the
program. And Reynolds' experience - along with the cases of two other
homeowners examined by ProPublica, shows how servicers have created
unnecessary hurdles that, in some instances, violate the loan program's

Housing advocates say they frequently see homeowners
rejected or kept in a trial modification for questionable reasons.
"There's a real resistance on the servicers' part to making permanent
modifications," said Diane Thompson of the National Consumer Law Center.

The administration set a goal of helping up to 4 million homeowners through the $75 billion mortgage modification program [1]
as a way to blunt the boom in foreclosures. Treasury has produced a
growing number of mandatory guidelines for banks and other loan
servicers to review applications and perform the modifications. In
exchange for tailoring loan payments to 31 percent of the homeowner's
monthly income, both the servicer and the owner of the loan receive
incentive payments.

Servicers representing 85 percent of the
housing market have signed up to participate. Applicants must first go
through a trial period before their mortgage payments can be
permanently reduced. But servicers have been slow to convert hundreds
of thousands of trials into permanent modifications - as of November, only about 31,000 had been made permanent [2].
That spurred Treasury to publicly criticize the servicers' performance
and to put out new guidelines in recent months to speed up the process.

Treasury said recently [3]
(PDF) that the effort has resulted in a "significant increase" in
offers of permanent modifications, but numbers demonstrating how
significant won't be available until February.

ProPublica has reported [4] since last June on homeowners' frustrations [5] in receiving a prompt answer [6]
from servicers, particularly the program's largest servicers - Bank of
America, JPMorgan Chase, Wells Fargo and CitiMortgage. In response to
widespread complaints, those servicers have dramatically increased
staffing and touted other improvements, such as new document management

But when homeowners do get an answer, the reasons don't
always jibe with how the program is supposed to work. Housing advocates
say this is a direct result of a lack of effective oversight of
servicers in the program, something [7] ProPublica has focused on before [8].

‘An Excuse to Deny Someone'

Reynolds was a prime candidate for a loan adjustment and was among the earliest homeowners to receive a trial modification.

mortgage brokerage business had followed the market downward, and as a
result, he'd fallen three months behind on his interest-only mortgage.
Area real estate cratered. His own home, bought in 2001 for just over
$400,000, had rocketed up to about $1.2 million in value in 2006, and
then down again to about $350,000. With a refinancing in 2005 and a
home equity line of credit with Countrywide, his mortgage debt exceeded
his home's value by more than 70 percent.

Soon after the loan
program was announced last February, Reynolds applied. He received an
application in late April and was accepted, making his first payment of
about $2,400 (down from $3,300) in May. He made six more payments. Like
many borrowers in the program, he says he was asked over and over to
send the same documents and later, updated versions of those documents.
Finally, in late November, he received an answer: He was denied a
permanent loan modification.

The reason? A Chase employee
explained to Reynolds that they'd determined his financial difficulties
weren't permanent. In his application, he'd written that he believed
that the government's rescue efforts would "save the U.S. housing
market" and that his business "will once again be profitable." The
Chase employee told him that statement indicated his hardship was only

"That's just nonsense," said Thompson of the consumer center. "To me, that sounds like an excuse to deny someone."

spokeswoman Christine Holevas told ProPublica that Reynolds had been
denied "because the skill and ability is still there to earn the
income." Since he'd "stated in his letter that business would be
picking up," it was "not considered a permanent hardship," Holevas said.

Such a determination contradicts Treasury's guidance to servicers for the program. A FAQ [9]
(PDF) issued to servicers says the program does not "distinguish
between short-term and long-term hardships for eligibility purposes."

ProPublica asked about this guideline, Holevas did not directly
respond. She did offer another reason for denying Reynolds: Chase's
review of financial information showed his income had not decreased.

who has a wife and two small children, says no Chase employee had made
such a claim to him and that the documents he provided show that his
mortgage business dropped more than 50 percent in 2009. He submitted a
new hardship statement in December, in which he tried to make clear
that his troubles are real and lasting. Holevas said those documents
would be reviewed.

Now, Reynolds says his finances are at the
breaking point and bankruptcy appears unavoidable if Chase denies him
again. "I did everything that was asked of me, but Chase has me backed
into a corner that I cannot get out of."

The Nine-Month Trial

months into a trial modification, Gary Fitz of California still doesn't
know whether or when his mortgage will be permanently modified, and
he's been told he'll have to wait for a few more months.


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the program's design, the trial period was supposed to last three
months, giving time for the servicers to collect and evaluate the
homeowner's financial information. At the end of the trial, if the
homeowner fit the program's criteria and had made all three modified
payments, the servicer was supposed to promptly make the modification

Instead, trial modifications routinely last more than six months, homeowners and housing advocates say.

[10] There are a number of adverse consequences [11]
of a trial period's dragging on, said the consumer law center's
Thompson. Because a homeowner is not making a full payment, the balance
of the mortgage grows during the trial period. The servicer reports the
shortfall to credit reporting agencies, so the homeowner's credit score
can drop. And most important, says Thompson, the homeowner isn't saving
money in case the modification fails and the home is foreclosed.
"Keeping someone in a trial modification really does not do them a
favor," she said.

Fitz's case shows why some homeowners have remained in limbo so long.

sought a loan modification in the spring of 2009 because his wife's
salary had been cut. Like millions of others, he applied soon after the
administration announced the program last February. He was accepted for
a trial modification and made his first payment in July.

was prepared for an uphill struggle. A Wells Fargo customer service
representative told him early in the application process that he should
make seven copies of his financial information - because Wells Fargo
would likely lose it more than once. He says he's sent the same
paperwork in five times.

When the trial stage lasts so long,
servicers commonly ask homeowners for updated financial information
months into the trial period. Fitz, for example, submitted his
paperwork for the first time last spring. But when Wells Fargo
requested an updated package in December, it showed that he'd received
a pay raise last June of about $80 per month.

Because of that,
Wells Fargo started him over on a new trial period - even though his
trial payments climbed just $27, from $1,733 to $1,760. His first
payment on the new trial period is due Feb. 1, meaning that by the time
he completes it, he will have been making trial payments for nine

Wells Fargo spokesman Kevin Waetke said the company does
not comment on individual borrower's cases. He did say, however, that
"the federal guidelines require a final review of updated financial
documents before moving any Home Affordable Modification from trial
status to complete."

That's not true. A Treasury guidance [12]
(PDF) to servicers issued in October, meant to streamline the review
process, says there is "no requirement" to "refresh" the homeowner's
documentation as long as it was up-to-date when it was originally

Wells Fargo also appears to have begun Fitz's second trial period contrary to Treasury guidelines. A Treasury guidance [13]
(PDF) last April said that a servicer should not begin a new trial
period if a homeowner has only a minor income change (defined as
exceeding the "initial income information by 25 percent or less"). Guidelines issued later [14]
(PDF) are even more restrictive about starting a new trial period. The
reason is clear: The purpose of the trial period for the homeowner is
to demonstrate the ability to pay, and such a small change in income is
unlikely to affect that.

Asked to respond, Waetke said that
"given the complexity of the program, the volume of calls we receive
and the number of modifications currently in process, there is the
potential for a mistake to be made." He added that Wells Fargo would
continue to review the case.

Buying Time

Sometimes there seems to be no reason at all for a trial period to drag on.

Mason of Texas, another homeowner with a Wells Fargo mortgage, also
recently restarted her trial period after several months.

spring, she sought a loan modification because medical and other
expenses had made it impossible for her to afford her mortgage payment
on a fixed alimony income. She'd planned to supplement that income with
a job, but has been unable to find anything. Like Fitz, she began the
program in July.

In October, good news came with a phone call:
She'd been accepted for a permanent modification. She waited for the
final paperwork to arrive, but it never did. Instead, while speaking to
a Wells Fargo employee about an unrelated issue six weeks later, she
found out that she'd in fact been denied. When Mason inquired why, she
says she was told some documentation was missing, but the employee
could not tell her what it was. She also learned she owed late fees
because she'd paid the modified payment, not the original, full
payment, in November and December.

When she complained about the
late fees (which were eventually canceled), she was passed to a
different employee, who told her she was being put back into a trial
period. She didn't understand why. Another representative finally told
her that she'd been denied because of a negative "Net Present Value"
test. The test is the calculation at the center of the Treasury
Department's program: It determines whether the loan's owner (sometimes
the lender, sometimes a mortgage-backed security's investors) is likely
to make more money modifying the loan or not. A negative result means
the servicer has no obligation under the program to modify the loan and
is a common reason for denial.

But in Mason's case, a Wells
Fargo employee told her she'd nevertheless been put back into the trial
period in order to "buy time."

Wells Fargo spokesman Waetke
declined to speak about Mason's case but did say that the bank
sometimes extends the trial period "to allow customers time to get the
documents so we can complete the review." Mason says she doesn't know
of any documents that might be missing, and she's not optimistic about
receiving a permanent modification. By extending the trial, Mason told
ProPublica, Wells Fargo is "just prolonging the inevitable" - denial.

you applied for a loan modification under the Obama administration's
Making Home Affordable program? Are you thinking about it? If so, we at
ProPublica want to hear your story [15]

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