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Pro Publica

Gov’t Loan Mod Program Leaves Some Homeowners Worse Off

Ryan Knutson

Marial Fernandez's two children in front of their Chicago home, which is now worth half the size of the mortgage. Fernandez was denied a permanent loan modification after making trial payments for seven months. (Photo: Pro Publica)

Susan Lauten had done everything right during her trial mortgage modification under the government's program [1]
to help struggling homeowners. She had submitted all the necessary
paperwork and made the required trial payments on time each month.

modifications are supposed to become permanent after three months of
successful payments. But even though she held up her end of the deal,
she found herself booted from the program, joining a swelling number of
homeowners who are finding themselves in a situation that's worse than
if they had never entered the program to begin with.

And it's just the latest example in a litany of problems [2] that have beset the government's efforts [3] to save millions of struggling homeowners from losing their homes.

they've been denied a permanent modification, homeowners owe the amount
they were discounted during the trial. Banks often demand that the
entire amount be paid as a lump sum right away or over a short period
of time, causing a homeowner's payments to swell beyond the original
monthly payment.

What's more, homeowners' credit scores are
damaged because trial payments are reported to credit agencies as
delinquent or as part of a payment plan.

"Being in a trial
modification if you don't get a permanent modification is worse than
having not been in a trial modification. Period," said Diane Thompson,
an attorney with the National Consumer Law Center. Worse yet, people
"may have a hard time finding alternative housing because some renters
check credit scores," she said.

Last year, a million Americans [4]
were given trial mortgage payment modifications by banks and other
companies that service mortgages. The Treasury Department has in turn
provided financial incentives to the banks. But the Treasury Department
encouraged banks to start trials quickly, causing banks to make trial
offers to people without fully vetting their eligibility, and
ultimately letting in many homeowners who were destined to fail. After lingering [5] for months awaiting final approval, thousands of homeowners are now being dropped [4] from the program as banks eventually decide they don't qualify.

those who were current on their mortgage payments when the trial
started, this can be especially brutal. If a homeowner can't afford the
sudden increase in the mortgage payment, the servicer can begin the
foreclosure process, whereas prior to the trial they may have been
eligible for other financing options.

More than 155,000 homeowners [4]
have been dropped from the program after starting trial modifications.
Some of those were denied for legitimate reasons, such as missing a
trial payment or experiencing a drastic change in income, but others
were kicked off because of errors at the banks [6].

Treasury Department expects as many as one-half of the homeowners in
loan modifications to fall out of the program. (Getty Images file
photo). These numbers are expected to continue to rise. There are nearly 800,000 [4] homeowners in trial modifications, and the Treasury expects one-third to one-half to fall out [7] of the program before their modifications become permanent.

the homeowner who was denied a modification after being in a trial for
months, is now dealing with this reality. After losing her job at a
university clinic last July, she wrote to her bank, Wells Fargo,
explaining she would need help with her mortgage in the coming months.
In September, Wells Fargo replied, offering a modification that brought
her payments down to $433 per month from more than $900.

homeowners who are current on their payments, mortgage servicers, the
companies that handle modifications and foreclosures, have always been
required to obtain documented proof of income before offering trial
modifications. But Wells Fargo didn't ask Lauten for them until after
she started making trial payments, she said. (Citing confidentiality,
Wells Fargo declined to comment on Lauten's case.)

Lauten made
the reduced payments for seven months, but was told in March that she'd
been denied a permanent modification, after the bank seems to have
decided her income wasn't sufficient. The difference between the
regular payments and reduced payments accrued during the trial period,
meaning Lauten now owes $2,200 on top of her payments, which have
returned to more than $900 a month. According to a letter Wells Fargo
sent Lauten, the bank gave her one month to pay back the $2,200, or
else the bank would begin the foreclosure process.

"I had no choice," Lauten said, adding that she's scrambling to come up with the money.

denial could have been avoided - by way of never offering a trial in
the first place - if Wells Fargo had verified Lauten's income before it
gave her a trial modification.

When a trial is granted without
proper documentation, a homeowner can be denied even if both the bank
and the homeowner act in good faith to do everything right. For
example, homeowners may not understand exactly how banks calculate
income under the program. That can lead to miscommunications, causing
the servicer to offer a modification that the homeowner was not
eligible for, said Lisa Sitkin, a staff attorney at the Bay Area-based
Housing and Economic Rights Advocates.

Unlike homeowners who
were current, Treasury initially told banks it was OK to rely only on
stated income for trial offers to homeowners who were 60 days or more
behind on their mortgage, the logic being that it would prevent
delinquent homeowners from falling even further behind on payments.

at a Mortgage Bankers Association conference in February, Laurie
Maggiano, a Treasury official who sets policy for the modification
program, acknowledged the low bar for letting people into the program.


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The strategy was "just get ‘em signed up," she said. People got in on "on a wing and a promise."

method of signing homeowners up who were delinquent and relying only on
their stated income has been criticized by housing counselors, and it
mirrors the questionable way people with shaky finances were given
subprime mortgages in the first place.

Earlier this year, the Treasury Department announced new rules [8]
(PDF) for the program, making it mandatory for servicers to review
documentation for all homeowners before beginning a trial - regardless
of whether they are current. The change, which applies to all trials
starting June 1, will likely result in fewer homeowners' being denied
after making trial payments.

The cost of that, of course, is "it
could mean that fewer trial modifications are offered," housing
attorney Sitkin said. But "if they do it right, we should be seeing
that the rate of conversion from trial to permanent should go up

If Lauten can't come up with the money, her only
options are to sell the house for less than the outstanding mortgage
amount (a so-called short sale) or hand the house over to the bank. Now
that Lauten is faced with losing her house, she wishes she never agreed
to a trial modification in the first place.

"I would have sold furniture or something" to make the original payments, she said. "I would have done what I had to do."

homeowners may have also been allowed into the program because in
addition to not verifying income, banks sometimes also failed to run
all the necessary tests before hand to see if they qualify. And when
they finally do run the tests, they sometimes make mistakes, again
leaving homeowners in a difficult spot.

Marial Fernandez was in a trial modification for months before the bank ran what's known as a Net Present Value test, an opaque calculation [9]
developed by the Treasury Department that determines whether the loan
modification is in the best interest of the investor. Those tests are
supposed to be run before a homeowner is ever offered a trial. When her
bank, Chase, finally performed the test on Fernandez, the result turned
up negative and she was kicked out of the program - seven months after
she started.

Chase also sent Fernandez's a statement saying she
owed $22,000 in back payments she accrued during the trial, including
late fees.

Fernandez felt misled. "I don't feel they disclose
that if this trial period doesn't work for you, you're going to owe
$22,000 at the end," she said. "We would have looked for something

Fargo employees help homeowners go over paperwork during a free
workshop in Oakland, Calif., in April. (Justin Sullivan/Getty Images
file photo)The bank apparently made an error when it ran
the NPV test. It wasn't until calls from ProPublica that her case was
given more scrutiny.

Just days after we contacted Chase
inquiring about Fernandez's situation, the bank offered her a permanent
loan modification under better conditions than her trial. "During the
trial process, we required additional information and, after some
confusion, approved the loan for permanent modification," Chase
spokesman Tom Kelly wrote in an e-mail.

Kelly said Chase started
trial modifications for delinquent borrowers not only without first
confirming their income but also without running an NPV test "in order
to keep them from falling further behind." He added that for homeowners
who were current, documented proof of income was obtained and NPV tests
were done prior to making trial offers.

Fernandez's new
modification would have reduced her payment to about $1,500 per month
from $3,100, but she decided to turn down the offer because her home
was worth less than half of the loan amount.

Wells Fargo said in a March press release [10] that half of its trials will end in denials, and the second-most common reason is because of NPV failures.

you put people in a trial plan without verifying that they're going to
be able to go anywhere with it, it's just a collections tactic," said
Sitkin, the housing attorney. "Maybe they bought a little extra time,
but really that's money they could have been saving up for another

Reporter Paul Kiel contributed reporting to this story.

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