Cratchit here…

Well, it’s ‘that’ time of the year once again… the Christmas holidays.  For most people, in addition to being the celebration of the birth of our Lord and Savior, Jesus Christ, it’s also a time to spend with loved ones… our family members and close friends… a time to share in the spirit of giving and to remember all of the goodness that exists in the world.

Today, I’m the owner of my own business, Cratchit Vacation Travel, so every year I take a whole week off at Christmastime.  Of course, not everyone can do that, and it wasn’t always that way for me either, as you may recall.

When I was working for my Uncle Ebenezer Scrooge, many years ago, he never would have allowed that.  In fact, back then, my uncle was positively famous for hating Christmas and mostly because people didn’t go to work on that day.  “Christmas… bah humbug,” he used to say.  It sounds funny now, but back then it used to give me terrible fits and shakes when he would rail on about how he hated this time of the year.

Lucky for me, in Uncle’s later years everything changed for him as far as Christmas was concerned.  It was the craziest thing… one Christmas Eve he changed 180 degrees and he never went back to hating Christmas for the rest of his life.  Christmas actually became his favorite day of the year, if you can believe that.  It was like someone put something in his drinking water.  One Christmas Eve he went to bed a crotchety old man saying “Bah humbug,” and the next morning you wouldn’t have recognized him.  He was jumping all around, telling everybody Merry Christmas, and even showed up at our house with the biggest Christmas Goose I’d ever seen.

From that day forward, Uncle Ebenezer used to say that Christmas was the one day each year when nothing else should matter but spending time with loved ones… and he always did just that, and especially with little Tim, who wasn’t doing at all well back then, until Uncle Ebenezer came by that Christmas morning.  I always believed that if he hadn’t come that day, we might have lost Tiny Tim one day. When Uncle passed away a few years ago, it was hardest on Tim, I think, and I know he misses his Uncle Ebenezer most on Christmas Day.

Christmas is also the time when the bankers get to show off their magnanimous natures by announcing that they will delay foreclosures, trustee sales, and evictions of homeowners until after New Years’ Day.  They’ve been doing it every year, ever since the foreclosure crisis started a few years’ back, so I wasn’t the least bit surprised this year when, on December 3rd, Les Christie, a staff writer at CNN/Money.com wrote:

“Several of the big mortgage players are playing Santa Claus again this year, saying they will not evict borrowers in default during the two weeks surrounding Christmas.  Freddie Mac (FMCC) and Fannie Mae (FNMA), the two government-controlled mortgage giants, are freezing all foreclosure evictions on mortgage loans they own or back from Dec. 20th through Jan.3rd.”

And Christie’s story also quoted Anthony Renzi, Executive Vice President of single-family portfolio management at Freddie Mac, as saying:

“If the property is occupied, our foreclosure attorneys will suspend the eviction to provide a greater measure of certainty to families during the holidays.”

And a spokesman for Bank of America (BAC, Fortune 500), by the name of Rick Simon, was also quoted in the story saying, said that the bank would still observe its usual holiday policy.

“Bank of America’s practice in recent years is to hold off on foreclosure sales or evictions from late December through New Year’s Day…”

And Christie also reported that Wells Fargo’s (WFC, Fortune 500) holiday (foreclosure) freeze will run the same two week period as Fannie’s and Freddie’s.

Playing Santa Claus my ass!  That’s what I have to say about that.  Those bankers wouldn’t know how to play Santa Claus if you fattened them up, stuck them in a red suit, and made them grow white beards.  Hell, I’d bet you that even if you made a banker look like Santa Claus, he’d probably walk around saying “HO, HO, HOmeless!”

Christie referred to the banker’s holiday foreclosure freezes as being a “temporary reprieve” for homeowners but personally, I think it’s a big crock of crap.  It’s not a “reprieve” for the poor homeowners losing homes… no, sir… it’s a reprieve for the bankers, so that everyone won’t see how they’re kicking people out of their homes during the holidays, when they should be modifying those loans in order to help people stay in their homes.

See, if the bankers kept on foreclosing through the holidays, that would make a fine news story for the folks at CNN and MSNBC, and they might send a camera crew to cover a few Christmas Eve evictions just for the drama and the tragedy of it all.  You know how those people love to film train wrecks, it’s like they say, “if it bleeds, it leads.”

So, the bankers realized that those news crews might just start talking with some of those homeowners being forced from their homes on a day like that, and those people would then have a chance to tell the rest of the country how they’ve been treated by their banks… how they should have gotten a loan modification but were denied… and without anyone even telling them why.

And that wouldn’t look so good for those bankers who are really a lot like my Uncle Scrooge used to be… before that one Christmas Eve when he totally changed forever.

If you want to know the truth, I don’t think the banks should be allowed to stop foreclosing and evicting for the holidays… we should pass a law that forces them to keep doing what they do every other day of the year… right through Christmas.

I’d bet you that if we did have such a law on the books, you’d see a whole lot of loan modifications being granted in December, I’ll tell you that.

Bankers playing Santa by not foreclosing and evicting people for a few weeks around Christmas… what a bunch of shit that is… it’s like when a foreign dignitary is coming to London, and they move all the homeless people living in the streets a few blocks away from the parade route, so they can pretend they’re not there.  Or, when you watch those newsreels of Adolf Hitler playing with his dog and smiling at the kiddies… yeah, right… like you’re supposed to say… what a nice guy he appears to be.

And just whom do they think they’re fooling?  How do you think the people feel… the ones that are losing their homes right after the holidays… do you think they’re able to enjoy the holiday knowing that this will be the last Christmas they get to spend in their family home?  I’d bet some don’t even decorate or even celebrate… how could you with something like that hanging over their heads.  And what do you suppose they tell their children when they tuck them in to wait for Santa to come?  It breaks my heart to think about people losing homes unnecessarily at any time of the year, but no time is worse than Christmastime for something like that to happen.

It would be one thing if there was no option, or if they really couldn’t afford to stay there, but if you read the news lately, you know that’s not the case for hundreds of thousands of folks.  In fact, attorney Diane Thompson, who works for National Consumer Law Center has testified recently that she’s represented hundreds of homeowners who were being foreclosed on that weren’t even in default!

And did you read Mandelman’s column yesterday about Bank of America, Chase and others breaking into people’s homes and stealing their belongings, including that woman’s husband’s ashes.  The article was funny in some ways, that Mandelman always makes me laugh, but in other ways that article made me want to scream.

Look, we now should all know that many, if not most, of the people losing their homes are only losing thembecause the servicer is involved.  It’s the servicers that are saying they won’t modify the loans and proceeding with the foreclosures.  And that’s because the servicers make the most money when they service a delinquent loan for a while… and then foreclose on the homeowner.

It’s true… Professor Levitin from Georgetown University recently explained all that while he was testifying in congress.  Want to know something else?  I just learned that Citibank gets 25% of the trial payments if the loan ends up in foreclosure!  Can you believe that?  I don’t know about the other banks, but I’d be willing to take a guess that what’s good for the gander is good for the other ganders too.

And servicers are the ones that have the LEAST to do with the loans in the first place.  They don’t own the loans, they only service them… and they get one quarter of one percent to service a prime loan, half a percent to service a prime loan… but one and one quarter percent for servicing a delinquent loan.  So, you add on all the junk fees for foreclosing onto that and you’ll see why that guy that used to work at Chase… the one that Mandelman interviewed a few months back when he wrote that article, “Inside Chase and the Perfect Foreclosure”, said that Chase was in the foreclosure business, not the modification business.

So, think about it… we’ve got the servicers… the companies that have the least interest in the loans in the first place, and make the most by foreclosing on loans, deciding on whether someone should get a loan modification?  What kind of stupid and uniformed idea is that?

I wish Obama would have told us that when they announced the plan back in February of 2009.  Instead we had to spend a whole year trying to figure out why it was that everyone who called their bank directly to get their loan modified was being treated like shit before being foreclosed on and evicted, without ever even knowing why.  The hysterical thing is how the servicers lied all the time, blaming it on the borrowers, saying it was their fault for not getting their paperwork in right or on time.  That was all a bunch of B.S.

You know how we know that now, right?  Because Treasury just reported that more than half of the people turned down for HAMP ended up getting their loan modified by a servicer anyway, but using some sort of in-house program.  But, guess what… a lawyer recently told me that he compared a HAMP modification to an in-house version from Well Fargo, and the in-house version was going to cost the homeowner roughly $180,000 more over the life of the loan, even though they looked similar on the surface.  See… that’s exactly the kind of crap my Uncle Ebenezer used to pull before he changed, that one Christmas Eve.

Yep, the only people losing money and more are the homeowners and the investors that own the loans.  The servicers are making a bloody fortune, and the banks are getting off easy too.  I say it’s time we all should write to our elected representatives and tell them we’re wise to this game and we want the servicers taken out of the middle as far as loan modification decisions are concerned.

And that there should be no more stopping foreclosures and evictions at Christmastime… because bankers aren’t playing Santa, they’re harming people, causing them to have the worst Christmas ever as they sit and think what’s going to happen when the holidays are over.

I hope all those people that are being delayed for the holiday, get every sale date postponed for as long as they can.  File bankruptcy… that’ll stop the sale date.  Or hire a lawyer and ask him or her how to fight the bankers as long as possible.  Maybe something will change… it sure can’t remain like this forever.

Well, Christmas Eve is almost here so I’ve got to run.  I want to get to sleep early tonight, because last night I had the worst night’s sleep ever.  You wouldn’t believe it, but I had the strangest dream about my Uncle Ebenezer and he was with his old partner, Jacob Marley, who I hadn’t thought about in years.

Well, they both appeared in my dream and they were rattling chains and howling in the most hair raising tones… and they kept yelling out these names that I wasn’t familiar with over and over… and they were dancing about chanting that they were going to visit this group of people this year, AND EVERY YEAR on Christmas Eve.

They were saying… Oooooo… Lloyd Blankfein… every year for as long as it takes…Oooooo… Kenny Lewis… every year for as long as it takes… Oooooo… Vikram Pandit… every year for as long as it takes… Oooooo… John Mack… every year for as long as it takes… Oooooo… John Stumpf….. every year for as long as it takes…Ooooo… Jamie Dimon… every year for as long as it takes… and were others mentioned too… and they went on and on… over and over.  I awoke in a cold sweat, shaking like a leaf in high winds.

I have no idea what they were talking about, and it was probably just the Chinese food I had for dinner, but it scared the living daylights out of me, and I was afraid to even try to sleep after that.

So, Merry Christmas to everyone, and thank you to Mandelman for allowing me to guest post on Mandelman Matters… it’s by far my favorite blog, right behind Yves Smith’s and Matt Tiabbi’s of course, but we don’t have to tell Mandelman that… he’s sensitive this time of year.

And, God bless us… everyone.

~~~~~~

Bob Cratchit

President & CEO

CRATCHIT VACATION TRAVEL, INC.

“Taking you places you never dreamed you’d go.”

Here’s something you don’t find every day on Mandelman Matters, a whole series of videos, most from C-Span’s coverage of various congressional hearings, and all having to do with the foreclosure crisis.  Some feature testimony by NCLC’s rockstar foreclosure defense attorney, Diane Thompson, who I think is the bomb.  And you find Georgetown Law Professor, Adam Levitin, who clearly explains that the problems with loan modifications are the mortgage servicers, companies that he explains are closely tied to the banks and the trustees, and that continue to refuse to release data that would show how loan modification programs are actually working.

Diane Thompson of National Consumer Law Center

He also says that servicers are not in the modification business and that asking them to be is asking too much.  He also thinks that when the servicers come to congress and testify as to how many modifications they’ve done, they count each one more than once… as in each loan has multiple modifications.  And I, for one, was relieved that I wasn’t the only one who has been noticing that, and writing about it, for some time now.

Georgetown Law Professor Adam Levitin

The videos are very telling as to just how difficult the foreclosure crisis is to solve because the banks and servicers are so difficult to deal with and because the regulators don’t want to see too much because then they’d have to take some action… and Treasury’s orders are to allow the banks to take necessary write-downs from retained earnings over ten years.

Hearing that sentence testified to in congress gave me chills.  You see, in Japan that’s sort of what the banks did… they laid low, doing little if any lending for a decade until they could write down the over-valued assets from pre-1990, when their real estate bubble popped.  However, I wrote once that if Secretary Geithner thinks that the 10-year hold-your-breath strategy will work here, I think he’s wrong… although I may have employed more colorful phraseology than that at the time.

For one thing, we are not living in Japan.  My impression is that we can’t even sacrifice for one winter by keeping our thermostats under 70 degrees, and the Japanese could probably live through a decade of winters with no heat at all.  So, if he thinks he can tap dance around what the banks have been doing in the last two years for another eight… he’s high.  No way, no how.

I recent;y read that today, 20 years after the Japanese real estate bubble popped, assets are still struggling to recover.  In Japan, housing prices declined steadily from 1990 to 2004, had a small blip up in 2004, but then started falling again.  If that sort of thing happens here, I don’t think we’re going to take it nearly as well as the Japanese.

But, that’s how we seem to be handling things so far, with the bankers as our special class, essentially immune from real regulation, and apparently allowed to behave badly in the name of their recovery.  To me it looks like the bankers have succeeded in scaring the administration into believing that no one but who we currently have in place at major banks is capable of bringing those banks back from the dead, so we all better tip-toe around them, because they’re very easily upset.

Okay, so I promised no reading, so I’ll shut up.  Watch them all, you’ll learn a lot… I sure did.

~~~~~~~

DISCLAIMER:

THIS IS A LONG ARTICLE.  VERY LONG.  LIKE IT COULD BE A BOOK LONG.

I’VE WRITTEN IT FOR THE PERSON WHO WANTS TO LEARN A LOT ABOUT WHAT’S GONE ON AND IS STILL GOING ON IN THE LOAN MODIFICATION WORLD, AND THEREFORE WOULD SEE READING IT, AS TAKING A LOT LESS TIME THAN THE YEAR AND A HALF THAT IT TOOK ME TO LEARN THE STUFF I’VE WRITTEN ABOUT HERE.

IN OTHER WORDS, WHEN COMPARED WITH TWO YEARS, THIS ARTICLE IS ACTUALLY A SHORT CUT, BIG TIME.  BUT IF YOU DON’T WANT TO LEARN A WHOLE LOT ABOUT LOAN MODIFICATIONS, I’D SAY PROBABLY SKIP IT, OR SKIM IT FOR THE PARTS THAT YOU’RE INTERESTED IN LEARNING ABOUT.

IN OTHER WORDS, IT’S NOT FOR EVERYONE… I HOPE IT PROVIDES VALUE TO THOSE LOOKING TO LEARN ABOUT WHAT I’VE LEARNED OVER THE LAST TWO YEARS, A SUBJECT THAT HAS CAUSED A GREAT DEAL OF PAIN FOR A HUGE NUMBER OF PEOPLE WHO CONTINUE TO SUFFER IN SILENCE.

ENOUGH DISCLAIMER… IF YOU READ IT NOW, IT’S ON YOU.

My Year in A-Trance: What I’ve Learned About Loan Modifications

It was roughly two years ago when I first heard the term “loan modification”.  Dubya was still “the decider,” Hank was running Treasury and looking older by the day, and it was FDIC Chair Sheila Bair, who was advocating the idea that the banks should be modifying the tens, and then hundreds of thousands of loans that were already defaulting each month.  With millions more on the horizon certain to default, I thought the idea of loan modifications had merit from day one.

Up until then, I had been focused on the federal government’s potential response to the growing foreclosure crisis.  I was hoping for something along the lines of what we did during the 1930s when the federal government established the Federal National Mortgage Association for the purposes of refinancing mortgages in order to stop the same type of freefall in the housing market we were experiencing then and we’re still experiencing today.

The Federal National Mortgage Association is today’s Fannie Mae, and it was originally established in 1938 as part of FDR’s New Deal.  Throughout the 1930s, the federal government continually proclaimed that recovery was just around the corner, only to discover the following year that they had been wrong once again.  (When you think about it… what were they supposed to say?  But, when the economy fell into yet another deep recession in 1938, it was just too much to handle for many Americans.

During the 1930s, homeowners defaulted on mortgages en masse, which not only led to banks being strapped for cash, but after nine years of economic downturn, they had absolutely no interest in investing in home loans.  Fannie Mae was established to buy up home loans from banks thereby freeing up capital that could be lent out to other borrowers, and also to provide local banks with federal money to finance home mortgages.  The goal was to free up capital for lending, stimulate home ownership and increase the availability of affordable housing… and it worked.

In the beginning, Fannie Mae was run like a national savings and loan that allowed banks to charge significantly lower interest rates on mortgages to those purchasing a home.  Eventually, this would lead to the creation of what we now call the secondary mortgage market.

Fannie Mae, because of it received financial support from the federal government, borrowed money from foreign investors at very low rates.  Because Fannie Mae could borrow at such low rates, it offered fixed rate mortgages with low down payments, making its profit from the difference between the interest rates homeowners paid and rates charged by foreign lenders.

Fannie Mae began operating as a Government Sponsored Enterprise or “GSE” after being “privatized” by President Lyndon B. Johnson, in 1968.  Taking Fannie off the books was just one of the ways Johnson reduced the budget in order to make it easier to pay the bills for the war in Viet Nam.

As a GSE, Fannie was a private company in the sense that it generated profits that could be distributed to shareholders, but remained exempt from taxation and continued to be able to borrow at exceptionally low rates because of the implied backing of the United States government.  And because Fannie Mae had always functioned as a monopoly of sorts, Freddie Mac was established in 1970 to create at least the impression of competition.  Freddie went public in 1989.

Today, Fannie and Freddie raise money to purchase mortgages from pension funds, mutual funds and foreign governments.  They are so large, both in terms of assets and debt that alone they can influence our economy and the economy of foreign nations, and as a result, neither will ever be allowed to fail.

This past Christmas Eve it was announced that going forward the Federal Reserve along with the U.S. Treasury would provide unlimited funding for the “twins,” should give us some idea of just how important these two mortgage giants really are to our economy and its recovery.

We can debate whether or not we are facing another Great Depression, but the government lifting the caps on financial support for Fannie and Freddie is a very definite indication as to just how concerned our government is about what’s ahead.

So, back in 2007, although I was focused on another federal government funded solution to the growing housing crisis, I also saw clearly that President Bush simply wasn’t going to have the government step in with what would have been seen as a bail out of the very homeowners, that at the time, were being blamed for the crisis.  So, when Sheila Bair brought up loan modifications, I thought… Wow, a Bush appointee with a brain… go figure.  (Kidding, I’m just kidding… I’m a kidder.)

Paulson, however, wasn’t having any of it, at least not until months later into the crisis.  It always seemed to me back then that Sheila would walk into a meeting on the crisis with Treasury, wait for her moment, bring up loan modifications, and then Hank would say something like, “Thanks for your input, Sweetie,” and then ask her to go get him coffee, or whatever he drinks… green tea, perhaps.  I don’t actually know what their relationship was like, and I don’t really think he was a hold out from 1955, but I do know from reading several books about those days that Paulson was no fan of hers, and he certainly wasn’t supporting anything she had to say publicly.

Then, after months of fighting between Barney Frank and POTUS, July of 2008 rolled around, and President Bush finally signed the bill that would create the infamous Hope-4-Homeowners program that I knew didn’t have a prayer from day one, but sure was fun to make fun of later.  In case you don’t remember it, it had that crazy equity split kicker clause, that said if your house went back up you had to split it with the bank or with the government or some such nonsense, and there was no way it was going to fly.  Wrong plan, wrong time, wrong political climate… simple as that.

Six months later, when it would be announced that the $320 billion program had only modified one single solitary mortgage, after I stopped laughing of course, I wrote a couple of scathing articles about the sheer stupidity of the program.  Meanwhile, I decided to find out how loan modifications worked.

The first family I interviewed had tried to get their loan modified on their own for eight months without success.  At just about the end of their proverbial rope, someone in the family heard a radio ad for a company that said they could help… they made the call, hired them by paying $3,500 up front by the way, and within 60 days they were granted a loan modification.  They were happy as clams once their loan had a modified payment, but the process they described wasn’t pleasant in the least.  They told me about their bank, Washington Mutual, losing their paperwork more than once, treating them very rudely on numerous occasions, and months spent not knowing one way or the other whether they’d be keeping their home.

They had three young children, and they told me about the sleepless nights, his increased drinking, both of them fighting, the impact on the kids and the family as a whole… it sounded awful, even though they were very happy now that it was over and had ended with them being able to stay in their home.  They lived out past Hemet in a place called Menifee, California, that I had never heard of before, even though I’d lived in California for twenty years.  I remember thinking, why would anyone build such a nice housing development way out in the middle of nowhere.

I remember them telling me that they had paid $450,000 and had monthly payments of $1800 not including taxes.  A year later, give or take, it was worth 225,000 at most, and the monthly payment had doubled.  Nice loan, I thought, in a snapping turtle sort of way.

I remember her telling me that they didn’t go to college, didn’t know anything about mortgages, and trusted the bank “to tell us what we qualified for,” she said.  I told her that I did go to college, and to graduate school… twice… but that I also didn’t know anything about mortgages, and that I had trusted my own bank the same way she did.

Anyway, luckily they found a company that helped them get their loan modified, advance fee and all, and everything eventually worked out fine, so I asked for the company’s number so I could call and interview someone there.  And that’s how it started.

Before you caould say “non-judicial foreclosure state,” I had spoken with dozens of people involved with helping homeowners get mortgages modified, and they all had very similar things to say.  For one thing, it very quickly became abundantly clear that that the banks didn’t want anyone to have help when applying for a loan modification; they obviously wanted homeowners to show up alone and unarmed.

The lawyers I interviewed, none of whom knew each other, all told me identical stories about how their clients would call the bank when it was taking a long time to get their modification, and the bank would claim that they’d never heard of or from the attorney, which would cause all kinds of problems.  They told me about how the bank would repeatedly lose the paperwork being submitted, or refuse to work with any third party representing a homeowner for no apparent reason, even when the third party was a licensed attorney legally representing the homeowner.  They all spoke of how the banks would keep calling the homeowner even after the bank had been notified in writing that the homeowner was being represented by legal counsel.

And they didn’t just say these things, many of them invited me to their offices to listen in when they called various banks, with their client’s permission, of course.  I’ll never forget one specific call I witnessed being made to IndyMac.  After waiting on hold for what seemed like forever, the woman at IndyMac answered and immediately said that the attorney calling would have to get the borrower on the call as well.  He agreed and conferenced the homeowner in, and as soon as the homeowner identified herself and said hello, the woman from IndyMac said: “You know, you don’t have to pay him.”

I have to say, I was shocked.  I couldn’t help but say something, so I stepped forward and said: “Excuse me… I’m a writer doing a story on loan modifications.  How did you know that she was paying him?  How do you know he’s not her brother-in-law doing her a favor?  Are you trained to say that to anyone who calls and is represented by a third party?”

The line went dead.  The woman at IndyMac had hung up on me just for asking a question.  We called back, but another 40 minutes went by with no answer and I had to leave for another appointment.  It was obvious that something was seriously wrong here.  I’d never heard a bank act that way before, and I could not understand why a bank would not want someone to hire a lawyer to help them get their loan modified.  At 47 years old, and after owning my own consulting firm for over 15 years, I had hired lawyers on quite a few occasions, and frankly, no one had ever cared one way or the other.

I wrote an article about my experience with IndyMac and a lot more people read it than I had been expecting.  Apparently, this sort of thing was not an isolated incident… this sort of thing and worse was happening routinely, and nothing was being said or done about it by anyone.  The more I wrote about what I was seeing and hearing having to do with loan modifications, the more people wrote in to share their own experiences.

Lawyers, mortgage brokers, real estate agents… as well as homeowners… from all over the country started contacting me each day by email.  I realized very quickly that, from a qualitative research standpoint, I was in a very unique position… and the more I wrote about what was happening, the more people reached out to me and wanted to talk.

From the beginning, it seemed to me that getting a loan modification was, to large degree, a random event.  There didn’t seem to be any discernable pattern in what was happening.  On any given morning, one lawyer or other industry professional would call and tell me that Chase, for example, was great… that they were getting easier to work with and had granted a series of modifications with really good terms.  An hour later, I’d get another call telling me that Chase was impossible to work with and that they were foreclosing left and right.

Wells Fargo is easy to work with… Wells Fargo is impossible to work with… Bank of America is doing some principal reductions… Bank of America never does principal reductions.  IndyMac… well, no… IndyMac was always terrible by all accounts.

The calls and emails from homeowners would then verify the random nature of how the banks were behaving when it came to loan modifications, as would all of the reading I would do both online, and on the rare occasions when the press would run a story about the bank’s bad behavior, as opposed maligning the those offering to help homeowners with their banks and servicers.

The media had started referring to anyone who offered to help a homeowner obtain a loan modification a “scammer”.  Automatically, no matter what… end of discussion… if you were charging a homeowner for your services and attempting to get that homeowner a loan modification, then you were a “scammer,” plain and simple.  It never sat right with me.  How could it be ALL of them?

The media would run a story, I remember one on the news magazine show, 20/20, in particular, that would show some guy who didn’t want to be filmed, being chased around by a camera crew, as the voiceover explained that the guy had promised a handful of people he could get their loan modified but had failed to do so, or perhaps, they said, had not even tried.  I remember the guy’s office was in some strip mall in some rundown part of some nowhere town.

But the numbers they reported were always so small.  One guy… a handful of homeowners… accusations that wouldn’t normally make anything but the most local of news broadcasts were now being aired as feature stories during prime time on national news programs.  And meanwhile, I was interviewing homeowners… hundreds of homeowners from almost all 50 states… who each told incredibly similar tales of how they had tried to get their loan modified on their own but failed… and finally hired a firm to help them… and soon after got it done.  The contrast between what I was watching on television, and what I was hearing from homeowners each day was positively surreal.

To make things that much stranger, the media didn’t seem to be even the least bit interested in hearing about what I was being told by hundreds, or by that time perhaps thousands of homeowners… they just wanted to find another “scammer” who they could make look like a representative sample of the entire field.  It seemed very Y2K to me.

After all, to-date we’ve lost seven million homes to foreclosure in this country, so at the time that number was probably something close to half that number.  And if 3.5 million people were hiring firms to help them obtain loan modifications… and they were all scammers as the media clearly wanted me to believe… then it stood to reason that there should be some fairly large number of the scammed and the scammers… and yet there simply was not such a number being published anywhere.

I contacted an editor at one of the major business magazines who shall remain nameless because I don’t want to make him look bad, and I asked him what the heck was going on.  He replied that the banks were his and everyone else’s largest advertisers, and that he thought it unlikely that I would find anyone who wanted to run a negative story about the banks as a result.  Call me naïve, but I was shocked by that answer… back then.  Today, nothing I hear about the banks and their influence on our government and the media comes even close to shocking me.  Had I heard that same sentence today, I would have replied with something to the effect of: “Yeah, so what else is new.”

This was all happening during the fall of 2008, when the foreclosure crisis was well underway, and I had given up on any meaningful response from a government that on either side of the isle was only interested in one thing: Election Day, 2008.

Meanwhile, however, I was noticing another fascinating thing about our nation’s foreclosure crisis: It was a silent crisis, not unlike AIDS in the beginning.

While the banks had their PR machines in full gear, and the government had their bully pulpit… homeowners at risk of losing their homes had no lobbyists, no PR firms on retainer; no voice to be heard.  And those in the fledgling field of helping homeowners with loan modifications, whether lawyers or licensed real estate or mortgage professionals, having been told ad nausea that the entire industry was made up of nothing more than unscrupulous scammers, didn’t communicate with each other, simply because by now they too didn’t trust each other.  Each new firm’s owner that I’d meet would begin by telling me how they, and perhaps they alone, were “doing it right”.  All others were something less, and worse.

I decided that, in the best interests of my readers, there was a need to clearly define what was a scammer in my way of thinking, and what wasn’t, and so I stated in numerous articles that a scammer was one who took your money under false pretenses and delivered nothing in return.  If someone was in fact modifying mortgages, then they could not accurately be branded a scammer.

I felt the need to distinguish what was a scammer in this way because I realized that there were always going to be homeowners who could not get their mortgages modified no matter what they, or anyone else tried, which made total sense as the government officials were saying the same thing during interviews.  Clearly, not everyone would qualify for a loan modification, there were a myriad of reasons that this might be the case, and I had already bumped into a few homeowners who were all to ready to blame their lawyer for their situation, instead of their bank.

It was fascinating to me, for example, that roughly six months later, when CNN/Money asked readers to write in and tell their stories of dealing with their lenders and servicers as related to attempting to get loan modifications, how so many of the letters read.  Over one weekend, I read 600 letters written by homeowners who DID NOT HIRE anyone to help them, choosing to go it alone as the government had told them they should, and they were all furious at the outcome, with the majority having lost their homes to foreclosure.

These homeowners complained of the same behaviors that the lawyers and others complained of… banks losing paperwork multiple times, waiting on hold for hours only to be disconnected, and banks treating them like they were, well… dirt farmers from The Grapes of Wrath.  They were all angry at their bank, they were all angry at their government, because they hadn’t hired anyone to help them, they didn’t have anyone else with which to be angry.

Then I started looking online and reading the complaints written by homeowners who claimed to have been scammed by a company that had promised to get their loan modified… and didn’t.  Some of them seemed unquestionably legitimate… they were robbed and it was sickening read about.  Who in the world would scam a homeowner at risk of losing their home out of their last few thousand dollars?  That takes a special kind of scumbag, no question about it.  Scam the rich?  I understand.  But to intentionally scam a middle class family who is trying desperately to hold onto the family’s home?  Seriously?  What does one do after that, set up a company that systematically robs the blind?

But many of the complaints I read were not about scammers, using my definition anyway.  They were people that paid a lawyer who failed to get their loan modified, but they were not cases where someone took the money and ran, they were cases where the given bank refused to modify the loan.  I was able to tell the difference because by that time I’d read, interviewed, and heard so many others, that now my perspective provided clarity that others wouldn’t be able to share.

Some homeowners said that they had called their bank and been told that their lawyer had not been in contact with the bank… which I knew from experience happened all the time and, in all of the instances I had followed up on, never true.  Some directed their anger at a law firm not modifying their loan, which left me wondering why they weren’t voicing their anger at their banks… lawyers don’t modify loans… banks and servicers do… or don’t, as the case may be.

The most interesting thing was that the homeowners that complained about the firm they had hired wrote complaints that were essentially identical in content to those complaints written by homeowners who DID NOT HIRE anyone to assist them.  I followed up on more than a hundred such complaints by calling the homeowners who had complained, and found that my suspicions were largely correct.

When one loses his or her home, one complains, and understandably so.  The only consistency in the way the banks have behaved has been that they’ve behaved horrendously and dishonestly towards distressed homeowners at every turn.  If one has hired a lawyer or other professional to help them, then they are angry at that individual or firm.  If one has attempted to get their loan modified alone, then the anger is directed at some combination of the bank and the government.  But, over a sample of hundreds from across the country the nature of the complaints is very near identical.

Back in 2006, when the foreclosure and economic crisis was just beginning, the country was told that the problem was being caused by “irresponsible sub-prime borrowers,” people who had bought houses they never should have been allowed to buy, or people who were trying to flip the homes at a profit and been stung when their risk-taking went bad.  It was never the case, but it sure sounded right to a lot of people.  Many still believe it to be the case today, although I would tell you… fewer and fewer and not for long.

Back then I wrote an article about the sub-prime borrowers that poked fun at the idea that such a group were capable of causing such a widespread economic collapse.  In that article, I pointed out, with a healthy dose of sarcasm thrown in, that borrowers simply didn’t have the economic clout to cause what they were being accused of, and that it was the banks that were behind the meltdown that would soon spread far beyond the sub-prime universe.

Many people have continued to resist the idea that it was not the poor judgment, excessive risk taking and irresponsible debt levels of borrowers that had caused the crisis.  After all, by 2006 they could see evidence of those excesses all around them.  And it’s certainly true that many people did take on more debt than they should have, and that many made less than prudent decisions.  But, it’s a bit like saying that it was the flooding that caused so much damage in New Orleans during Katrina.  It’s certainly true, but I still think it was the hurricane that was the proximate cause, right?  Yes, there was flooding… but it was more the hurricane, don’t you think?

By allowing the misconception that borrowers caused the crisis to take hold, we divided the nation between responsible and irresponsible homeowners, and once we discovered that it was really not borrowers fueling the economic collapse, we didn’t have the political will to do what was needed to stop the carnage.  Who would possibly want to bail out a bunch of irresponsible sub-prime borrowers, after all?

So, I waited for our new president to announce his program to address the housing crisis, which he did on February 18, 2009 (and you can watch again by clicking that link).  There was no question in my mind that the Making Home Affordable program never had a chance of succeeding and my article published immediately following his speech that evening said it in plain terms: “I’m Sorry Mr. President, That’s Simply Not Enough.”  Barack Obama was a new president, however, and a very popular one with most of the country’s voters anyway.  Additionally, he was seen as being smart, and having surrounded himself with people considered even smarter.  So… we would have to wait and see, before we’d be willing to criticize his plan to stem the foreclosures that were dragging down our economy, whether we wanted to admit that fact or not.

The Treasury Department, in conjunction with a myriad of supporting federal agencies and other experts collaborated very quietly on the Home Affordable Modification Program, or HAMP, as we know it today.  Treasury Secretary Tim Geithner was under a lot of pressure to roll out the program, and although it was supposed to be ready in April, it was late in May and into June before most of the banks were talking about it with homeowners.  The problem from the beginning was that while qualifying for most government programs is a fairly transparent process, qualifying for HAMP was from the beginning, anything but.

It would seem that, in creating the Net Present Value (NPV) formula that would be used to qualify a homeowner for the HAMP program, they had set out to build a car and ended up building the Space Shuttle, only to discover that they had no astronauts.

Right out of the gate, HAMP was a mess.  First of all, as yet another voluntary program, it was up to the banks as to whether they would or would not participate.  Secondly, the requirement that a borrower enter a trial modification period during which he or she be required to make trial payments, led many to believe that they were approved for a modification when in fact they were not.

Third, the HAMP guidelines, as I wrote in an article at the time, carry the weight of… well, guidelines.  When they’re broken or otherwise not adhered to by lenders and servicers, homeowners found that they had little recourse.  And fourth, the president told everyone that “loan modifications are free,” that all you had to do was call your bank directly, or call a HUD counselor, neither of which worked most of the time for most of the people.

Had the government told everyone the truth about the program, had the regulators developed a methodology for qualifying borrowers that utilized the power of the private sector, what we’ve seen transpire over the last year might have been avoided.  But they didn’t… to tell the truth, I mean.  And the mess that’s gone on, and continues to go on (as I wrote about again here) as a result is nothing short of breathtakingly and shockingly tragic.

To give you an idea of just how ineffective the HAMP program is to-date, almost one year after its launch, the latest Making Home Affordable Servicer Performance Report shows Wells Fargo Bank N.A. as having completed 30,014 permanent HAMP modifications, and the same report shows that Wells has 378,480 eligible borrowers who are 60 days or more delinquent through March 31, 2010.  Do the math and rounding up, you get 8%.

I wasn’t sure whether to call that good or bad until I recently saw a quote from Nancy Bush, a well-respected banking industry analyst, who made the statement that Wells Fargo has 15,000 people processing nothing but HAMP loan modifications.  So, 15,000 people and 30,000 loan modifications?  That would be, and correct me if I’m wrong on my numbers here, but that would be TWO EACH at the end of year one of the program.

What’s the deal… are we talking about doctoral dissertations or HAMP loan modifications?  Because I’m thinking that 15,000 people should be able to get more than two done in a year’s time, unless I’m missing something here.

There is a silver lining though… Wells also reports having just over 9,000 “pending permanent loan modifications,” which I just had to mention, not only because it still makes for an irrelevant total, but because the category itself is funny.  Pending permanent?  As in “trial”?  Apparently not.  LMAO! (And ask your teenager if you’re unsure what that stands for, I learned it from mine.)

Bank of America has roughly 32,000 permanent modifications as of March 31, 2010, but that’s out of 1,085,894 eligible loans more than 60 days past due.  So, that’s… oh, hell… let’s just call it a tiny percentage and leave it at that.  BofA does have an additional 38,000 and change in the pending permanent category, so that would make it… I don’t know… still, a tiny percentage of those eligible.

I could go over every servicer whose performance is shown in the latest report from Treasury, but what would be the point?  There are no stars, only underachievers, and these numbers are coming in months after the program started to receive the intense criticism that is commonplace today, so you have to assume these numbers are after they fixed a few things.  Here’s a link, in case you’re interested in seeing an inefficient and ill-conceived government program as reported on by the Treasury Department: Click here for the latest HAMP Report.

Obama’s First Year…

So, HAMP guidelines finally started showing up in banks last June, and even though I was still convinced that the program would not fly, the rest of the media was taking a wait and see attitude.  It was like they wanted to believe, so they clicked their heels together and said: “There’s some chance of home.  There’s some chance of home.”

Throughout the summer of 2009, I talked with more and more homeowners and law firms helping homeowners and there was simply no good news to report… the program was a bust for sure, even if most people didn’t know it yet.  At the same time, the “everyone’s a scammer” campaign was kicking into high gear.  It seemed as if the bankers were controlling everything, the media and our government, while servicers were tossing homeowners out of their homes like there was no HAMP at all.

The summer of 2009 was when I learned a couple of key things about the crisis by looking into the excuse-of-the-month club that banks were participating in whenever the subject of loan modifications, or the lack thereof, came up.  (I wrote about it in my article “Lies and Damned Lies About Getting a Loan Modification”.)

Straight out of the gate the banks went with the “we’re overwhelmed” defense.  Apparently, they wanted us to believe that they were trying their absolute hardest but just couldn’t handle the volume of requests.  Bank of America, with its 40 million credit card holders who can call a toll-free number 24/7 to find out where they purchased gas last Friday or how much interest they paid in 2005, now was having a hard time answering the phone for homeowners seeking a loan modification.  Chase simply could hire anyone, because the financial sector was, I supposed, running at full employment on whichever planet they lived on, and Wells Fargo was having the darndest time stopping their employees from losing paperwork over and over again.

I wasn’t buying any of it.  Those excuses had been moderately interesting to me the year before, when I wrote the article titled: “Why Banks Are Better at Making Loans Than Modifying Them,” but not now, a year later.  If BofA wanted to answer the phone by now, it seemed obvious that they’d be doing so.

Next up was the very confusing, “we’d-like-to-but-the-investors-won’t-let-us” argument, which generated quite a few articles and actually caused me to make an attempt at reading an actual Pooling & Serving Agreement, or PSA, which was 700+ pages long, and might have damaged my brain, leaving me with the intellectual capacity of a butternut squash.  PSAs are the agreements that govern how the servicer is to service the mortgages that are owned by a securitization trust, which in turn has investors who hold certificates that entitle them to some percentage of the cash flows generated by those mortgages.  It’s all part of the whole securitization scheme that Wall St. had become convinced had eliminated risk… LMAO, again.

The argument was that somewhere in these 700+ documents, it said that the servicer wasn’t allowed to modify the mortgages owned by the trust, so if the banks did so, they’d be sued by these investors… blah, blah, blah.

The problem with this argument was that it required reading a document that no mere mortal could possibly read… and live to tell the tale.  And it sounded like it could be right, or hold some degree of merit anyway.  Luckily, before I had to read more than a couple hundred pages of one PSA, several other people, much smarter than I, were able to debunk the theory stating that was why banks weren’t modifying loans.

Berkeley published a study that showed only 6% of PSAs actually prevented servicers from modifying loans, the vast majority said that servicers were responsible to maximize the profits of the investors, and placed some restrictions on the modification of mortgages, things like they had to be delinquent before you could modify them, and common sense stuff like that.

But it was attorney, Diane Thompson, testifying in Congress about the whole loan modification nightmare that really saved the day.  She explained that servicers NEVER get fired, and that they can modify loans when it makes sense to the investor to do so, but that they don’t because their interests aren’t aligned with anyone else’s.  (My article about Diane’s wonderful testimony can be found here.)

Servicers, I learned, make 25 basis points or one quarter of one percent to service a prime mortgage, 50 basis points or one half of one percent to service a sub-prime loan, but 125 basis points to service a delinquent loan, so it was in their best interests if the loan just stayed in default for a year before they foreclosed.  Not only that, but I learned that servicers have to make the payments to the trust or investors on behalf of delinquent borrowers and the only way they get that money back from the trust, was to foreclose… or make it a performing loan.  Foreclosing was a guarantee of being reimbursed.  Attempting to create a performing loan was not.

Next there was the very interesting question of whether servicers actually have incentives to foreclose, and IndyMac was the first case study.  It came to my attention that IndyMac, which had been sold to One West Bank, had arranged with the FDIC to have something referred to as a “loss sharing agreement”.  My friend, a longtime banker and fairly brilliant mathematician who was at IndyMac when the FDIC took control of the bank pointed it out to me, and I proceeded to write a couple of articles on the abomination.

The way a loss sharing agreement works is somewhat complicated, but basically it says that the FDIC will pick up 80-95% of the bank’s future losses depending on some other factors related to overall losses.  The point being that if IndyMac forecloses, which at that time they were doing with alarming frequency and consistently, the loss sharing agreement would likely make what appeared to be losses, into profits.

The whole question revolved around whether it was in the best interests of the bank to foreclose or whether it was better to modify, from a strictly financial perspective, and because of things like loss sharing agreements, and some now allowed accounting abuses courtesy of the Treasury Department et al, that was a much more difficult question to answer than one might have otherwise thought.

This past year, 2009, was also the year that FASB, the Financial Accounting Standards Board, could have hung out a sign that read “Gone Fishing,” for all the good they contributed.  Treasury Secretary Geithner basically, in laypersons terms, allowed the banks to write in all of their deposits but not deduct any of the checks they had written.  Foreclosed homes that went unsold for “an extended period,” whatever that meant, were not written down until they were sold, regardless of their market value at the time, so banks had homes in Las Vegas that today were worth maybe $30,000 on their books for $250,000… I’m guessing at those numbers, but I’m also guessing that I’m not that far off.

It’s Report Card Time…

Up until late July of 2009, I had certainly felt like the only writer who was talking about what a failure the president’s Making Home Affordable program was, and especially HAMP.  One prominent journalist told me that we had to wait and see before condemning the plan, and when Treasury issued the report cards in late July, which reported on servicer performance for the first time, my gloves came off, but so did the gloves of others.  All of a sudden what I had been seeing at the street level, could be seen clearly by millions, and Treasury was admitting that the program was “a dud”.

The reports cards made it abundantly clear that banks simply weren’t modifying loans under HAMP, in fact the numbers were so small that the whole thing just looked ridiculous… and sad.

I remembered the president’s words months before: “Just call your bank directly… You don’t need to pay anyone to get a loan modification…”  Oh yeah… right.  You very clearly did need to hire someone to help you, unless you didn’t really want your loan modified, which admittedly as home prices continued falling, fewer and fewer people did.

But the FTC, the California Attorney General, the California State Bar, and the California Department of Real Estate, along with similar governmental agencies from across the country, remained committed to telling us that everyone offering to help homeowners for a fee, obtain loan modifications was somehow scamming those homeowners by virtue of charging that fee.  It really didn’t seem to matter how much the fee was, or who was doing the charging, it was cut and dry… charge a fee to help a homeowner get their loan modified and you were going to be branded a scammer… case closed.

What I didn’t understand was why, even after the report cards came out, no one stopped to question the whole “everyone’s a scammer” diatribe.  I mean, now we could all see that it was the banks that were failing to follow the rules of HAMP, it was the banks that were refusing to modify loans even when it was clearly in their best interests to do so.  I would have thought that such news about bank behavior would have vindicated at least some in the legal profession, as in… maybe it wasn’t you who was failing to obtain a loan modification on behalf of your client, maybe it was the bank who was at fault here.  But alas… no.

In the fall of 2009, I attended the California State Bar’s Annual Conference, which was held in San Diego.  I went as a guest of Julie Greenfield who was chairing a committee on loan modification compliance, and I attended the symposium on loan modifications.  There was a panel of 4-5 so called “experts,” including Julie, but with the exception of Julie, no one had the foggiest idea what they were talking about.

The panel members tried to explain what had caused the economic meltdown, and didn’t even get close to being right, they stumbled around trying to explain credit default swaps and collateralized debt obligations (CDOs) and it was painful.  I interrupted the speakers 3-4 times.  I didn’t want to, but I can only take so much.  For a while, I wished for a fork on the table where I was sitting I could stab it into my thigh in order to distract me from the pain.  Finally, I gave up and put my headphones in, and thanked God for the iPhone.

That meeting, which was part of the California State Bar’s annual meeting, was embarrassing for the Bar, and for lawyers everywhere.  Had that been a medical convention sponsored by the AMA, the doctors in the audience would have returned home to start killing their patients as a result of what they had learned.

So, more than a year into the foreclosure crisis, and I had learned almost nothing about why things were going the way they were.  If it wasn’t the investors saying no, and it wasn’t the banks not being able to handle it… the incentives angle was interesting, but didn’t explain all 104 servicers… so what was it?  Why weren’t the banks modifying mortgages in any acceptable number?  Did they simply want the loans off of their books and onto the books at Fannie or Freddie?  Did they simply not care?

I continued my reading and found several academic studies that started to fill in some of the blanks.  My article on “How the Banks View Loan Modifications,” certainly got quite a few people understanding things that much better, but when the numbers of modifications just stayed essentially flat month after month, and the lies being published by banks and even the government just kept coming… I knew there was more to it, and I had to find out what that more was.

Greed?  Sure, but not consistently across the board.  Incompetence?  Sure, but also not so consistently across the board.  Corruption?  Okay, but really?  Conspiracies aren’t generally possible, especially with so many people looking at the situation… someone would have come forward and spilled the beans.

My article titled: “My Swan’s Song: Diane Thompson Testifies…” was a turning point of sorts.  Diane is an attorney who helps people negotiate with their banks for things like loan modifications, and she’s works for a nonprofit legal aid type place, so she’s considered eminently credible.  Whatever you think, she’s wicked smart in my opinion, so when her testimony included many of the things that I had been saying in my articles for the past year, I decided that there was no question… I was right, and the world would simply have to catch up at some point.

It was at about this time that I got a call from a senior executive at a software company that had created the platform that would be used by banks and servicers to determine whether a borrower was eligible for the HAMP loan modification program.  He was frustrated that servicers hadn’t readily embraced his company’s platform, which would make handling loan modifications dramatically different as compared with the experience to-date.  He had read my articles on servicers being unwilling, unable, or just plain uncooperative when it came to loan modifications, and he was calling to tell me I was right.

I learned about how HAMP and the infamous NPV analytic had come to be, the product of numerous federal agencies each weighing in as to what should go into the qualifying criteria for what would become HAMP.  And he was able to tell me about how the NPV worked and what it was trying to calculate beyond its published “waterfall” analysis that was used to qualify the borrower based on simple calculations related to gross income and mortgage payment, certainly not a net present value calculation by any means.

A net present value calculation, in case you weren’t a finance geek in school, is simply a way of comparing the value of money today with the value of that money at some point in the future.

Money today is worth more than money in the future, right?  Because money today can be invested to grow into larger amounts in the future, while the money in the future won’t buy as much because inflation will have decreased its buying power.  But the problem with calculating the NPV is that you don’t know what “discount rate” to use in the calculation.

Here’s a simple example: The NPV of $2,000 ten years from today is $1227.83, if we assume a discount rate of 5%.  So, if someone said they’d give you $1,000 today or $2,000 in ten years, you should take the two grand because it’s worth more than the NPV of $1,000 today.  The problem is, how do you know that 5% is the appropriate discount rate for the calculation.  When I was in business school, they taught us to use the rate being paid on the 30-year Treasury bond, but who the heck knows what Treasury or the banks are doing these days.

HAMP’s NPV formula, however, involves a lot more than what they teach in business school because, for one thing, the Treasury refused to release it, and there’s nothing secret about what I just explained above.  I learned that the HAMP NPV, among other things, was attempting to ascertain the re-default risk of the borrower, and to do so it was using factors such as property address, credit score, and numerous others that were not being made available to the public.  Now, that’s transparency for you, was all I could say.

Understanding the complex nature of the NPV, and the process that lenders and servicers were using to ascertain whether a given borrower was or was not qualified under HAMP, was all I needed to come to grips with the whole trial modification mess.  As of the end of 20009, we had some incredibly large number of trial modifications and some incredibly small number of permanent modifications.  And although everyone wanted to know why, I knew why.  Not to the penny, perhaps, but I knew why.

Unless a borrower’s information is entered into the complex rules engine in the platform developed by my fans at the software company, no one could know who is and isn’t qualified for HAMP’s loan modifications, not even the lenders or servicers, until the Treasury Department tells them.  And because Treasury only says “yes” or “no,” no one

In other words, with only a handful of servicers running the software in question, and the balance all using the spreadsheet method through which the lender or servicer only receives a yes or no answer in response to submitting a borrower’s application to HAMP, not only did no one know who qualified and who didn’t, but the servicers weren’t even getting better at it.

Was HAMP designed for the homeowner or the banks?

As 2009 was coming to a close, whatever positive spin HAMP had been enjoying throughout the year had come to an abrupt end, and the program was fast becoming a flop in the eyes of, well… everyone.  The Obama Administration would undoubtedly continue to make attempts at making the program better, but for the moment, it wasn’t accomplishing much of anything as far as stemming the tide of foreclosures… they were at an all time high as of the first quarter of 2010.

The position of the banking lobby remained unchanged: Lenders and servicers have the right to foreclose whenever and for whatever reason they chose if you’re not make your payments and they would support nothing that would impinge upon that right in any way.  It was a slippery slope, as far as the bankers were concerned.

I spoke with dozens of attorneys from across the country that had been involved in loan modifications and they were united in the view that obtaining loan modifications before HAMP was much easier than after the government’s new program was made available.  HAMP actually started to appear as if it was better for the bank than the borrower.

HAMP requires the borrower to enter into a “trial modification” phase prior to a permanent modification being granted, and this allowed the banks to receive monthly payments while the modification was in process, but because those trial payments were always a lesser amount than the borrower’s normal payment, the bank could allow the foreclosure timeline to continue as if no payment was being made at all.  If the borrower was ultimately approved for the permanent loan modification under HAMP, fine.  If declined for the modification, the bank was free to move to trustee sale within a matter of days.

Qualifying for HAMP was supposed to be based on criteria described in the program’s guidelines as “transparent and disclosed”.  The reality of the program turned out to be anything but.  I learned fairly quickly that no one was able to tell you with any certainty whether you qualified for a HAMP loan modification or not, and the only way you would find out was to apply, make months worth of trial payments, and then hope like crazy that you received a final approval.  If not, you could likely find yourself with 30 days to move.

The reality of HAMP has been that it has helped the banks more than borrowers.  While it was supposed to provide borrowers with a set of objective standards by which they could qualify, it has only released a partial listing of those requirements, which although not the same as releasing none, has certainly proven to be woefully inadequate.

The fact is, not a single homeowner that applies for a HAMP modification today has any idea whether he or she will or won’t qualify for the program.  Assuming the homeowner’s income meets the published guidelines, the amount of the mortgage fits within the maximum, and they have not be granted a modification under HAMP within the allowable timeframe, they will be placed into a “trial modification,” but as hundreds of thousands of learned, that plus something like $3.75 will buy you a tall-decaf-skinny-mocha latte at Starbucks.

These unfortunate souls, many of whom believe that they are on their way to a loan modification that will allow them to avoid foreclosure and remain in their homes, soon find out that the only difference between them and someone who’s renting, is that renters have more rights and are given more time to move.

I would soon find an answer for homeowners that would allow them to know with certainty whether they qualified for HAMP before they even applied to the program, and that would become my mission for 2010… to seek out ways to let borrowers know that such a solution really does exist, even though it exists in an ocean of fakers and scams.

2010… I Learn Enough to Put the Pieces Together…

When I first started my journey into the housing crisis and loan modifications I’d learn something more than every day and some days it definitely felt like it was an overwhelming amount to know.  But, as 2010 arrived, things really started to change for my learning abilities.  Each new piece of information was now adding to the substantial amount that was already there, as a result off the last two years of investigation, and as a result, I finally felt like I was gaining on it.

It was sort of like when you’re doing a jigsaw puzzle that didn’t come with the box lid. and in the beginning you’re just turning over pieces and looking to separate corners from edges.  But once you have the border in place, and have started to complete the picture, you reach a point where you know instantly where almost every new piece you examine fits.  You’re in the homestretch, at that point, and it’s exciting again.

So, that’s how I felt as of December 2009 when the country learned that we had 650,000 plus trial modifications and something like 1,711 permanent ones.  Abysmal performance by any standard, but to me it was more than that.

While I agreed that the banks were being difficult and in fact didn’t want to modify many of the loans they perhaps could, it when I read the numbers for the program in late November, it occurred to me that whether you as a bank wanted to modify loans in general or not… NO ONE wanted to look this bad.  I mean, 1,711 out of more than 650,000?  That gave underachiever an entirely new meaning.

Then, around the first week of December, Treasury Geithner, or perhaps it was Assistant Treasury Secretary Michael Barr… or maybe it was just the Treasury Department’s spokes-spinner… made the statement that the HAMP program would have 350,000 permanent modifications completed by the end of 2009, which at that moment was less than a month away.

When the end of December came along, however, the Treasury Department could only announce 30,000 permanent loan modifications, a far cry from the 350,000 promised as the month began.

So, even when the heat was on, and the program’s poor performance was plaguing the Obama Administration’s popularity and credibility, and even after Treasury was shooting its mouth off about how many permanent HAMP modifications would be in the can by month’s end… they STILL COULDN’T get it done, so something wasn’t right at all.  I sensed a government inspired SNAFU was in the mix somewhere.

In January of 2010, I was invited to come speak at the American Bar Association’s Annual Conference on Consumer Financial Services, which this year was being held to discuss topics related to the economic meltdown, the resulting foreclosure crisis, and specifically loan modifications.  I was asked to speak from the homeowner perspective as part of a panel on foreclosures and loan modifications.  (I wrote about my thoughts of the time here.)

The conference was to be in Park City, Utah, at the world famous ski resort, The Canyons, and I was looking forward to getting away for a couple of days in addition to speaking to the conference attendees about what had become my favorite subject.  But, since those attendees were several hundred lawyers that worked for the banks and servicers, I was also worried that, having written at least dozens of articles severely criticizing the banks, those in attendance would be thinking about burying my body in the snow so I wouldn’t be found until the spring thaw.  (I wrote about the conference here.)

Also on my panel would be Tom Pahl, of the Federal Trade Commission or FTC.  Tom was an experienced FTC attorney who was involved in the regulatory agency’s attack on loan modification scams.  I listened to his talk, as I loaded by metaphorical shotgun for bear, and when it was my turn, I blasted holes in much of what he had just finished saying.

No… everyone who wanted to help homeowners obtain a loan modification wasn’t a “scammer,” as they were so fond of saying.  No… the banks weren’t overwhelmed, having trouble hiring people, or unable to stop losing paperwork over and over again.  It wasn’t the investors that were preventing modifications in the overwhelming majority of instances, and don’t get me started on HAMP qualifying criteria or the lack thereof.

At one point the banking PR machine actually made the statement that the problem with HAMP modifications was that 99% of borrowers had completed the firms inadequately or incorrectly, and I remember thinking… Wow… if 99% of homeowners applying for a loan modification under HAMP really did fill out the paperwork that way, then it sounded to me like filling it out properly was simply impossible.

When I finished speaking, Tom came back to the podium’s microphone and said he wanted a rebuttal.  I rose to say something television-lawyer-like, such as, “I object!” or “That lacks foundation.”  The next words out of Tom’s mouth shocked me, he said: “Basically, I agree with everything Martin just said.”  Had I been sipping my coffee at that moment I would have spit it across the room.

He went on to say that while he agreed that not everyone was a scammer, it was difficult for the FTC to tell the difference between the good guys and the bad one, and I had to concur that it wasn’t easy.  The firms helping people with loan modifications were almost always to scared to poke their heads above ground, for fear that the FTC, the State Bar, the Attorney General or the Department of Real Estate would shoot it off, and as a result there was no easy way of finding the legitimate firms.

But my point had been made and supported by the FTC: Not every law firm was scamming homeowners just by virtue of charging a fee in advance of services, but the FTC needed to know how to figure out who was who, fair enough.

I had in fact tried throughout the year to get the legitimate firms to come together as part of what I called “The Commission on Homeowner Representation,” but frankly I had only moderate success at best.  Although there were a few dozen firms that understood the importance of the new field coming together to represent itself to the nation and differentiate itself from the scammer hype, too many of the firms involved were either too myopic, too skeptical, too hard to find and reach, or too cheap to support such an endeavor.  The Commission continues to limp along today, but limping isn’t like to win many races.

The FTC Sets Out to Make a Rule…

One of the things I learned at the Park City conference was that the FTC would be making a rule that was to govern how firms that offered to help homeowners obtain loan modifications would operate.  The FTC’s position seemed reasonable to me, and they would be asking for commentary before the final rule would be announced in early June.

When I returned home from Park City, however, an FTC press release said that the proposed rule would preclude anyone, including a law firm, from receiving any fee or compensation until a loan modification had been obtained on behalf of the homeowner.  So much for reasonable, was my first thought.  This proposed rule could not be allowed to be codified, because if it did become the law of the land, no attorneys would offer to represent homeowner seeking loan modifications and the result would be nothing short of disastrous.

The same type of thinking had influenced the California legislature in 2009, and since I had been instrumental in helping California lawyers who helped homeowners obtain loan modifications find a workable compromise so that could continue their operations under the new bill known as SB 94, I set out to try and influence the FTC and others, so the new rule would be one that made sense.  We will have to see how that plays out in the months ahead.

Here Comes the Judges…

In April of 2010, I was again asked to speak on the topic of the foreclosure crisis and loan modifications, only this time, instead of lawyers in the audience there would be judges from the 9^th Circuit.  In audience there would be judges from the bankruptcy, district and appellate courts, and as a bonus it was held in Santa Barbara at the beautiful Four Seasons Resort, which is right on the beach.

I decided that I would give the judges a crash course on the causes of the economic meltdown that led to the foreclosure crisis in an attempt to provide the judges with context and perspective that I hoped would be helpful in their courtrooms.

I was also part of a panel that included my close friend, Julie Greenfield, who has been a mortgage banking attorney for many years, but now helps homeowners save their homes, and a lecturer from Stanford University, who was simply wicked smart and covered securitization and how it changed the banking system.

The whole event was truly fabulous.  The judges reacted very favorably to our panel’s presentation, and many came to the stage when we finished our 90-minute presentation to ask questions.  I learned that judges are smart people, and I like smart people.  I also learned that they don’t know everything, and they do need to and appreciate hearing from perspectives outside their own.  At the end of the day, I felt sure that most of the judges got something of value from what I talked about, and I am hopeful that it will make even the smallest of differences for homeowners.

HAMP Today… and Tomorrow…

So, as I write this… this admittedly incredibly long treatise… HAMP is still the problem it’s been since the New Year began.  There are hundreds of thousands of trial modifications and far too few permanent modifications.  And far too many homeowners are still reporting that they find out that they don’t pass the undisclosed NPV test… and then days later they find out that they’ve lost their home to a trustee sale when they find the investors that purchased their home standing on their front porch looking in their home’s windows to see what they’ve already bought.  And that simply cannot be considered even remotely acceptable to me or anyone else, for that matter.

Part of the problem, truth be told, lies with Congress… and part of that problem lies with homeowners, although I don’t want the reader to take that statement the wrong way.

The fact is that modifying a mortgage is a voluntary proposition as far as lenders and servicers are concerned.  And that’s a matter of the law, or rather the lack of a law, in this country.  There simply isn’t a statute that allows the government to make the modification of a legally binding mortgage contract mandatory.  The government can say they want it modified, and they can provide incentives to encourage lenders to modify, but that’s about the long and short of it.  That’s why HAMP has “guidelines”… not rules… “guidelines”… not laws… “guidelines”.

The reason I say that it falls to homeowners is that Congress is responsive to large and powerful special interest groups, and it’s hard to imagine a larger and more powerful special interest group than that of the 20 million or so homeowners who have either already lost homes to foreclosure, or will lose a home to foreclosure in the next couple of years.  You heard me right… 20 million American homeowners… certainly one of the largest special interest groups to ever wield influence in our democracy.

Do the math… we’ve already lost seven million homes to foreclosure, and this year’s estimates show another four or five million all but certain to be renters by year’s end. In fact, Goldman Sachs, who I can’t stand for many reasons, but has proven to be nothing if not prescient in these matters, forecasts 14 million homes lost to foreclosure in the next three years.  And 14 plus 7… yep, that’s 20+ million sure as shootin’.

Twenty million homeowners all focused at the House of Representatives is the sort of thing that gives our elected representatives nightmares that lead to panic attacks.  Can you imagine the power of that… or of half that number… or of half that number again… or even half again… why, we could write our own ticket in the groundbreaking legislation department.  Those Honorables in Washington would be scrambling to pass laws that would curry to our fancy faster than you could say “Synthetic CDO,” and a damn sight faster at that.

Why the banking lobby starts to look downright puny next to millions of American homeowners all shouting at the same time… “Congress better take note!  We intend to use our VOTE!”  Yep, after that the foreclosure crisis would be going on maybe as long as another twenty or thirty minutes.  Zip-bang… by golly… problem solved.

You see, the Founding Fathers set up the House of Representatives to be elected every two years so they’d always be responsive to the electorate.  The House has the power to override a Presidential Veto, while the Senate gets to approve the President’s cabinet appointees… big deal.  And there’s only one thing more important than money to our elected representatives… and that’s getting reelected.  Money may be important to those in the House, but compared to getting reelected, well… fuggataboutit.

And that’s all the financial lobbyists can offer our Honorable Members of the House of Representatives… money… campaign cash… nothing more.  But millions of homeowners across this country that are united by purpose can not only throw together a few million drachma just by checking under the cushions of their couches at home, but they can threaten to throw every single incumbent out of politics for good… and how do you think those in congress think about those apples?

So, although I’m pro-homeowner every single step of the way… and you’ll never hear me utter a disparaging word about someone who is at risk of losing his or her home, I have seen the enemy and it is us, the American homeowner… well, less me than you, truth be told.  Yeah, I said it… so what are you going to do about it?

Of all of the many things I’ve learned during my year plus inundated by the foreclosure crisis, the one thing I know more assuredly is that this crisis has been allowed to go on as long as it has because too many American homeowners either feel too helpless to even attempt to affect change, or they’re too damn lazy to try.  I don’t know which is the more accurate statement, but I do know this:

Too many American homeowners are living bound by the shame of losing a home or being at risk of losing a home… and it’s wrong… damn wrong… they should not feel as they so obviously do, because where they find themselves today is not their fault.

It’s our financial institutions that have caused our nation’s and in fact the world’s economic downfall.  You didn’t do it because you decided to refinance your home… I don’t care if you took the money to pay for a college education, a new car, or a trip to Hawaii and a new roof.  You’re just not important enough to have caused the end of American prosperity as we’ve known it for some 70 years… only the bankers of Wall Street have that kind of economic clout.

They’ve done awfully well as we’ve watched trillions in consumer wealth go up in smoke, have you noticed that?  The banks had their best year ever last year, in terms of bonuses.  The top six banks set aside $120 billion for 2009’s year-end bonuses, and frankly that should make you angrier than a wet hornet.  A year ago we were told that we had to bail the banks out with untold trillions… that’s right, TARP isn’t all there was to it… and a year later they’re rolling in dough?

We know they’re not lending.  What are they doing to make all this money if they’re not lending?  Renting out their conference rooms for AA meetings in the evenings?  Charging those recovering drunks for coffee, cause that might actually make them a few billion in cold hard cache.  (It’s a joke people… have you ever been to an AA meeting?)

I don’t care what they’ve been doing.  That’s right, I’m not even going to go look it up.  Doesn’t matter a bit, it’s still wrong, wrong, and then some, wrong.  You don’t break the financial market to such a degree that you bring the entire world to the brink of total disaster, get bailed out by the tax payers, and then start throwing around billions in bonuses the following year, as you offer to pee in the hair of a few million homeowners who you claim had no business buying their home in the first place.

Boy, this is one of those areas where every time I think about it, I miss the unabashed violence of High School.  You pull this kind of crap where I went to High School, and you get your Aunt Fannie kicked from here to next St. Patrick’s Day, simple as that.  Open and shut… that’s ball four… take a hike… you are all done here, young man… the showers are on.

This is the year of our Lord, two thousand and ten, an election year, and in case you’re not entirely sure why that’s significant, it means that even the slightest rift in our electoral fault line can leave our elected representatives feeling like Christian Scientists with appendicitis.  In other words, this is it people… it’s our time.  We’re the body politic, and we will be heard.  This is the year to shake, rattle and roll our congressional representatives.  Homeowners are in the House.  Sing it with me… Hey… Ho… Hey… Ho.

It’s time to wake up people.  It’s time to speak up.  Could I make it any clearer?

A Hundred Thousand Homeowners – Voices of Hope & Change

A Hundred Thousand Homeowners – Voices of Hope and Change is my attempt to bring together a movement of homeowners in this election year, in order to have a voice that’s heard in the halls of Congress.  Here’s my thinking on this:

A. Homeowners aren’t more vocal because they are ashamed, they feel powerless, and to some degree they are just plain tired, but mostly they are ashamed.  They don’t want anyone to know that they’ve lost their home to foreclosure, or that they are at risk of losing their home to foreclosure.  As a result, there is no voice in Washington D.C. representing homeowners and demanding that our elected officials do more to help those that are being tormented by the economic catastrophe that was caused by the lack of regulation over the practices of Wall Street’s bankers.

B. Seven million people have lost homes to foreclosure.  Another 14 million are at risk of losing a home to foreclosure in the next three years, according to Goldman Sachs.  If I could recruit just 100,000 homeowners to each contribute one dollar and sign on to the project, I would use that money to produce a “Video Documentary Message” that would be delivered… on DVD in high-impact, oversized, brightly colored packaging… ALL ON A SINGLE DAY, to:

• Every member of the House of Representatives
• Every member of the United States Senate
• The White House
• 4,000 Major Media Outlets, including television, radio, and print
• The CEO’s Office of the roughly 8,000 Banks in this country
• Every major non-profit housing agency’s Director or Executive in Charge
• Others To Be Determined

Each packaged DVD would be addressed as follows:

“A Video Documentary Message for: The Honorable John Q. Senator

From:  A Hundred Thousand Homeowners – Voices of Hope & Change”

C. The video documentary message would showcase the real life of what’s happening to homeowners in this country every single day.  How they are being treated by the bankers who have promised to participate in the President’s Home Affordable Modification Program.  Why they are where they are, and that they are not there as a result of being irresponsible.  What American homeowners want from their government, and why it is that what we want, is what’s best for America.

The message would ask for the following:

A. We want Congress to act to strengthen the HAMP program by adding hard and fast rules under which banks MUST write down a mortgage.  The program is funded by tax dollars and is NOT WORKING on a voluntary basis. Here’s how banks view loan modifications.

B. We want the Treasury Department or Congress to impose penalties on lenders and servicers who break the rules under HAMP.  Here’s what a judge said about HAMP rules.

C. We want Congress to allow judges to modify mortgages in bankruptcy court, just like what President Obama spoke of in his speech introducing the program that would allow for judicial loan modifications.  The threat alone wold motivate banks to do it themselves. My article on the subject: WE NEED JUDGES TO MODIFY THE WAY BANKS BEHAVE.

D. We want HAMP to require principal reductions under appropriate circumstances.  It’s not fair for banks to be able to foreclose on a home and then sell it to a new buyer for half the balance on the mortgage just to get it off of their books.  FDIC’s SHEILA BAIR  AGREES: Read About What She Says Here.

E. Congress must remove incentives that banks have to foreclose. Read Diane Thompson’s testimony in front of the senate.

D. Because the Video Documentary message will be delivered on the same day, it’ll make news.  And when it makes news, other homeowners will see what we’ve done, and when they do, I believe the 100,000 will become 300,000… maybe even 500,000.  And then I can send an email to everyone involved that asks each homeowner to send a letter and a big bag of sunflower seeds to one Senator’s office for one specific purpose.  And when that Senator comes into work the next morning and finds a few hundred thousand bags of sunflowers seeds with letters attached, he’s going to be paying attention to what that letter says.

And at the end of the day, homeowners will have a voice and that voice will be heard.  It’s only one dollar, but that’s not the problem… the problem is shame.  I don’t just need your dollar, I need you to recruit as many other homeowners as you can… and ask them to recruit others as well.  I know the desire is there, the need is there… the passion is there… but it won’t happen by snapping fingers, or clicking buttons.  If you’re willing to believe, we need you and we need you now.  Here’s a link to more details about the A Hundred Thousand Homeowners initiative.

Now Available: The REST Report

The REST Report is in my opinion, the best thing to happen to loan modifications since… well, since forever.  It’s the only way a homeowner can know with certainty whether or not he or she qualifies for a HAMP loan modification.  Period.  And it’s the latest thing I’ve learned about, since beginning my journey into the land of foreclosures and loan modifications almost two years ago.

It’s easy to sit back and criticize HAMP loan modifications, I’ve certainly offered more than my share of such criticism.  But so what?  HAMP is here, and HAMP isn’t going anywhere.  I wanted to offer something that would make a positive difference… something that would help homeowners to make the best of a situation that’s certainly less than ideal.  So, after ten months of hard work and investigation, I’m proud to be able to offer the REST Report to homeowners.

The REST Report is an 11-page report that will tell you with certainty whether you will pass the NPV test and qualify for a HAMP loan modification.  It’s a version of the same software used by banks and servicers to determine HAMP eligibility, and it’s the only platform that can tell you whether you pass the NPV test, as required by the US Treasury.  There’s no way I would even consider going through the loan modification process without having run my own REST Report and that’s the plain truth.

Here’s a link to my article on the REST Report, and I urge you in the strongest possible terms to read it if you are currently in the process of obtaining a loan modification, or if you are thinking of applying for a loan modification: The Best Thing to Happen to Loan Modifications Since… Well, Since Forever.

Mandelman Over and Out…

Over the last year and some odd months, I’ve written close to 300 articles on the economic, political and social costs of the foreclosure crisis, so even though I’ve suffered physically and fiscally from the effort, I do most definitely feel as if I’ve accomplished something significant.  Thousands of homeowners and others in the real estate and mortgage industries across the country have certainly made me feel as if I’ve done something important.  Lord knows I’ve learned an awful lot, and that’s never a bad thing.

So, yes… it was long.  And yes… I’m sure I’ve left out more than one or two things, for which I’ll kick myself later, but I’ve written it for those who found value in it.  I chose to write it, because I felt that others might benefit from the perspective I’ve gained from the path I took.  It’s history now, what’s happened over the last year and a half, but it’s important history because it’s been a time of great and lasting pain for so many that are so much like me… the parents, the homeowners, the business owners, the Americans… I wish it could have been different and I wish more than anything that it was over.

And it can be over soon, but not by wishing that it be so.  It will only end because of people that decide that they will never give up on the power of the people in this grand experiment that has created the greatest nation the world has ever known.

As Sir Winston Churchill said in what was undoubtedly the shortest speech he ever delivered, and yes, I know I could take a lesson from his apparent brevity…

“Never give up.  Never give up. Never. Never. Never.”

Just under one month ago, on July 26, 2009, Diane Thompson testified in front of the United States Senate Committee on Banking, Housing & Urban Affairs.  Her written testimony, which included 79 footnotes and 28 pages of exhibits, ran 55 pages in length and was titled: “Preserving Homeownership: Progress Needed to Prevent Foreclosures”.

Ms. Thompson is an attorney, currently of counsel to the National Consumer Law Center (NCLC).  During her tenure at NCLC she has provided training and support to hundreds of attorneys representing homeowners from all across the country.  As a result, she has heard many, many reports of the difficulties encountered by advocates and homeowners attempting to obtain sustainable loan modifications.

For nearly 13 years, prior to joining NCLC, Diane represented low-income homeowners at Land of Lincoln Legal Assistance Foundation in East St. Louis, Illinois.  In that capacity, she became intimately familiar with the difficulties commonly experienced when attempting to arrange a loan modification, even, as she specifically points out, “when it was clearly in an investor’s best interests.”

Her testimony was given on behalf of the National Consumer Law Center’s low-income clients, and on behalf of the National Association of Consumer Advocates.  She explained that on a daily basis, “NCLC provides legal and technical assistance on consumer law issues to legal services, government and private attorneys representing low-income consumers across the country.”

She is unquestionably a highly experienced and eminently qualified expert in her field.

The testimony Diane Thompson offered, of which excerpts are reprinted below, should be chilling to state and federal regulators and legislators, but most acutely to the California Bar Association, as it is the California Bar’s support of California’s Senate Bill 94 and Assembly Bill 764, that is about to cause irreparable harm to homeowners, the legal profession, and California’s economy, if not ultimately the economy of our nation.

For it is these two bills that, if passed into law, will effectively remove licensed attorneys from the equation for homeowners seeking to obtain mortgage modification agreements from their lenders and servicers by making it illegal for lawyers to charge an upfront retainer when agreeing to represent such a client.

It is worth noting that it has been the stated position of the California Bar Association, as found in their letters of support related to the two bills in question, that attorneys in California will still offer to represent clients seeking loan modifications even when prohibited from receiving a retainer in advance of the services being rendered, but there should be no question that this view is simply unfounded.  Having personally interviewed more than 50 attorneys currently involved in representing homeowners seeking loan modifications, the Bar’s view is not supported by any of the attorneys with whom I’ve spoken at length.

Further, this view illustrates the misperceptions surrounding loan modifications that are often held by those that have not been directly involved in attempting to obtain them on behalf of clients.  Diane Thompson’s testimony, however, should certainly provide anyone interested enough to read what she said before the United States Senate, with a real life view of what’s involved when attempting to obtain a loan modification for a client.

We should all understand some of the reasons that those not directly involved in providing such services often hold such erroneous views.  Up until recently, it was widely believed that the Obama administration’s plan was working as described and as agreed to by participating lenders and servicers.  We have now seen that this belief was unfounded, and I believe that the new evidence requires that the position of the California Bar, at the very least, be revisited.

In addition, although it is certainly understandable that the California Bar Association, inundated in 2009 with complaints written by homeowners claiming to have been in some way improperly treated by their attorneys required decisive action.  New evidence, much of which presented by Ms. Thompson, has led to a greater depth of understanding as to the source of many, if not most, of these complaints.  Homeowners have been ignored, mistreated, and lied to… but by their lenders and servicers more than any other.  However, it is clear that, with nowhere else to turn, they have complained vehemently about their lawyers more than any other party involved in the largely disappointing process.  Servicers and lenders, it should be remembered, don’t provide a place to lodge one’s complaint.

On August 5, 2009, the Obama administration released “report cards” showing the relative performance, or lack thereof, of lenders and servicers under the Making Home Affordable program.  The results provide a big picture view of a program that, although agreed to by its participants, is not being adhered to or in some cases, even offered in any meaningful way.  The following chart shows the administration’s report card for the eight largest mortgage serivcers:

What follows has been excerpted without modification from the July 2009 testimony of attorney Diane Thompson.  I will happily provide my readers with a copy of Diane’s testimony in its entirety upon request.  I have only excerpted her testimony to make its key messages more easily digestible for my readers.

I read her testimony throughout last night, until the sun started to rise outside my window.  And when I finished, I sat there and I cried.  It’s been a long road… and I pray that this document at the very least sets some part of our government on a course to understanding that our nation’s interests are not shared, nor are they aligned with the interests of mortgage servicers.  That their lobbying influence cannot be allowed to buy us into a depression.  And that… Homeowners Need Help.

Over the last few months, many of you have asked me what you can do to help the cause I’ve taken on, and now I’d like to answer you:

Send a copy of this paper to the California Bar Association… to the Governor’s Office… to Attorney General Brown… to your state and federal representatives.  Let them all receive hundreds of copies.  Let them know you’re paying attention.  Perhaps then they’ll have no choice but to read what attorney Diane Thompson had to say less than one month ago.  Send it to everyone you know who’s voiced an opinion on the subject since the crisis began.

And do it today, for I fear it may already be too late.

Thank you… for everything…

Martin Andelman

Chairman Dodd, Ranking Member Shelby, and members of the Committee, thank you for inviting me to testify today regarding the barriers encountered by homeowners attempting to access the Making Home Affordable program and the Hope for Homeowners program.

We are facing in this country a foreclosure tsunami, which threatens to destabilize our entire economy, devastate entire communities, and destroy millions of families. Large-scale, sustainable modifications are widely recognized as an essential component of restoring economic health to our country and hope to our homeowners.

There are three major federal programs designed to prevent foreclosures and preserve homeownership: Hope for Homeowners, the Making Home Affordable refinance program, and the Making Home Affordable modification program, or the Home Affordable Modification Program.

My comments will focus on the modification prong of the Making Home Affordable program.  Far more of the homeowners facing foreclosure are eligible for modification under the Home Affordable Modification Program than for refinance under either Hope for Homeowners or the refinance prong of Making Home Affordable.  Recent changes to both programs should increase eligibility and may increase participation. Still, restrictions on both programs are likely to continue to limit their reach.

A. Problems with Servicers’ Implementation of HAMP Plague Homeowners Seeking Loan Modifications.

Participating servicers violate the HAMP guidelines:

• Servicers still require waivers.
• Some participating servicers offer non-compliant loan modifications.
• Some participating servicers refuse to offer HAMP modifications.
• Servicers charge fees to homeowners for the modification.
• Servicers are continuing to initiate foreclosures and sell homes at foreclosure sales while the HAMP review is pending.

Servicer staffing and training still lag behind what is needed.

• Homeowners and counselors report waits of months to hear back on review for a trial modification, followed by very short time frames to return documents.
• Staff of participating servicers continue to display alarming ignorance of HAMP.
• Non-participating servicers continue to represent themselves as participating in HAMP.

Lack of transparency and accountability is resulting in summary denials and other unreasonable acts by servicers.

B. Certain HAMP Policies Must Be Changed to Provide Sustainable Modifications and Save Communities.

Transparency must be improved.

• The Net Present Value model for qualifying homeowners must be available to the public.
• The layers of documents governing HAMP, the guidelines, the Supplemental Directives, the various FAQ’s, and the servicer contracts, should be consolidated, reconciled, and clarified.
• Participating subsidiaries must be clearly identified.

Mechanisms for enforcement and compliance should be adopted.

• All foreclosure proceedings must be stopped upon the initiation of a HAMP review, not just at the point before sale.
• Homeowners should be provided with an independent review process when denied a loan modification.
• Homeowners should have access to an ombudsman to address complaints about the process.
• Denials based in part on a borrower’s credit score should be accompanied by an adverse action notice under the Fair Credit Reporting Act.

The HAMP guidelines should be adjusted to provide more meaningful relief to homeowners without reducing their existing rights.

• Homeowners need principal reductions, not forbearance.
• Homeowners suffering an involuntary drop in income should be eligible for a second HAMP loan modification.
• Homeowners in bankruptcy should be provided clear access to the HAMP program.
• Mortgages should remain assumable as between spouses, children, and other persons with a homestead interest in the property.
• Fair lending principles must be ensured throughout the HAMP process.
• HAMP application procedures should better recognize and lessen the impact of exigent circumstances.
• The trial modification program should be further formalized and clarified, such that homeowners receive assurances of the terms of the permanent modification and homeowners are not put into default on their loans if they are current at the onset of the trial modification.
• The final modification agreement should make clear that the homeowners do not waive any rights nor are required to reaffirm the debt in order to enter into the modification.
• The second lien program should be further developed to promote coordination with first lien modifications; servicers should be required to participate in both programs.

Goldman Sachs estimates that, starting at the end of the last quarter of 2008 through 2014, 13 million foreclosures will be started.  At the end of the first quarter of 2009, more than 2 million houses were in foreclosure.  Over twelve percent of all mortgages had payments past due or were in foreclosure and over seven percent were seriously delinquent—either in foreclosure or more than three months delinquent.

These spiraling foreclosures weaken the entire economy and devastate the communities in which they are concentrated.  Neighbors lose equity; crime increases; tax revenue shrinks. Communities of color remain at the epicenter of the crisis; targeted for sub-prime, abusive lending, they now suffer doubly from extraordinarily high rates of foreclosure and the assorted ills that come with foreclosure.

HAMP has not yet improved the situation: although modifications increased during the first quarter of 2009, all data indicate that the number and rate of total modifications fell back during the second quarter.

Worse, the modifications offered pre-HAMP (and presumably still by servicers not offering HAMP modifications) were overwhelmingly ones that increased the borrower’s payment and principal balance.

Only about three percent of the delinquent loans studied in Boston Federal Reserve Bank paper received modifications that reduced the payment. Professor White’s data shows that, in the aggregate, modifications increase the principal balance.  While the first quarter 2009 data from the OCC and OTS shows that a majority of the modifications (excluding short term payment plans or forbearance agreements) decreased the payment, most of those modifications also increased the principal balance by capitalizing arrears. Unsurprisingly, re-default rates on loan modifications remain high.

The good news is that, on paper at least, 75 percent of all the loans in the country should be covered by HAMP.  The bad news is that only 55,000 trial modifications have been offered and only 300,000 letters with information about trial modifications have been sent to homeowners.

The 300,000 letters containing information about trial modifications are obscured by the more than 2 million homeowners in foreclosure and the over 770,000 new foreclosure starts in the first quarter (of 2009) alone.

We do not yet have any data on the characteristics or performance of the HAMP loan modifications. However, extensive reports from advocates around the country show that the quality of loan modifications offered too often does not comport with HAMP guidelines.

Advocates for homeowners continue to report problems with implementation of the program.  Servicers are all too often refusing to do HAMP modifications, soliciting a waiver of homeowners’ rights to a HAMP review, and structuring offered modifications in ways that violate HAMP. These violations may be harder to detect than the gross failure of servicers to date to process a meaningful number of modifications, but they will vitiate HAMP just as surely.

The available data suggests that investors lose ten times more on foreclosures than they do on modifications.

A servicer may or may not lose money—or lose it in the same amounts or on the same scale—when an investor loses money.  And it is servicers, not investors, who are making the day-to-day, on the ground, decisions as to whether or not to modify any given loan.

Servicers continue to receive most of their income from acting as largely automated pass-through accounting entities, whose mechanical actions are performed offshore or by personified computer systems.  Their entire business model is predicated on making money by skimming profits from what they are collecting: through a fixed percentage of the total loan pool, fees charged homeowners for default, interest income on the payments during the time the servicer holds them before they are turned over to the owners, and affiliated business arrangements.

Servicers make their money largely through lucky or strategic investment decisions: purchases of the right pool of mortgage servicing rights and the correct interest hedging decisions. Performing large numbers of loan modifications would cost servicers upfront money in fixed overhead costs, including staffing and physical infrastructure.

Servicers’ Business Model Involves As Little Service As Possible.

As with all businesses, servicers add more to their bottom line to the extent that they can cut costs.

Servicers have cut costs by relying more on voicemail systems and less on people to assist homeowners, by refusing to respond to homeowners’ inquires and by failing to resolve borrower disputes. Servicers sometimes actively discourage homeowners from attempting to resolve matters.

As one attorney in Michigan attempting to arrange a short sale with Litton reports, the voice mail Warns: “If you leave more than one message, you will be put at the end of the list of people we call back.”

Recent industry efforts to “staff-up” loss mitigation departments have been woefully inadequate.  As a result, servicers remain unable to provide affordable and sustainable loan modifications on the scale needed to address the current foreclosure crisis.  Instead homeowners are being pushed into short-term modifications and unaffordable repayment plans.

Creating affordable and sustainable loan modifications for distressed homeowners on a loan-by-loan basis is labor intensive.  Under many current pooling and servicing agreements, additional labor costs incurred by servicers engaged this process are not compensated by the loan owner.  By contrast, servicers’ costs in pursuing a foreclosure are compensated.

In a foreclosure, a servicer gets paid before an investor; in a loan modification, the investor will usually continue to get paid first. Under this cost and incentive structure, it is no surprise that servicers continue to push homeowners into less labor-intensive repayment plans, non-HAMP loan modifications, or foreclosure.

Indeed, some of the attempts to adjust the incentive structure of servicers have resulted in confused and conflicting incentives, with servicers rewarded for some kinds of modifications, but not others, or told both to proceed with a foreclosure and with a modification.  Until recently, servicers received little if any explicit guidance on which modifications were appropriate and were largely left to their own devices in determining what modifications to make.

Servicers may make a little money by making a loan modification, but it will definitely cost them something. On the other hand, failing to make a loan modification will not cost the servicer any significant amount out-of-pocket, whether the loan ends in foreclosure or cures on its own. Until servicers face large and significant costs for failing to make loan modifications, until servicers are actually at risk of losing money if they fail to make modifications, no incentive to make modifications will work.  What is lacking in the system is not a carrot; what is lacking is a stick.

Servicers must be required to make modifications, where appropriate, and the penalties for failing to do so must be certain and substantial.

Servicers are designed to serve investors, not borrowers.  Despite the important functions of mortgage servicers, homeowners have few market mechanisms to employ to ensure that their needs are met.

Rather, in the interest of maximizing profits, servicers have engaged in a laundry list of bad behaviors, which have considerably exacerbated foreclosure rates, to the detriment of both investors and homeowners.

Servicers Maximize Income in Ways that Hurt Both Homeowners and Investors

Most servicers derive the majority of their income based on a percentage of the outstanding loan principal balance.  For most pools, the servicer is entitled to take that compensation from the monthly collected payments, even before the highest-rated certificate holders are paid. The percentage is set in the PSA and can vary somewhat from pool to pool, but is generally 25 basis points for prime loans and 50 basis points for sub-prime loans.

This compensation may encourage servicers to refuse principal reductions and to seek capitalizations of arrears and other modifications that increase the principal balance.

Servicers also receive fees paid by homeowners and the “float”—the interest earned on funds they are holding prior to their disbursement to the trust.40 For many subprime servicers, late fees alone constitute a significant fraction of their total income and profit.41 Servicers thus have an incentive to push homeowners into late payments and keep them there: if the loan pays late, the servicer is more likely to profit than if the loan is brought and maintained current.

In more normal times, it is surely rational for a servicer to spare itself the time and expense of modifying a loan in favor of the possibility of cure.  In normal times, when cure rates exceeded foreclosure rates, an investor would have little objection to the wait-and-see-approach.  However, this model cannot explain the failure to perform loan modifications when we observe real world conditions: dropping cure rates, due in part to the restricted ability to refinance, even for homeowners with high credit scores and homes so deeply underwater that investors lose 65 percent of the mortgage debt on average in foreclosure.

If we take the 30 percent cure rate documented for loans during 2007 and 2008 in the paper co-authored by Mr. Willen, assume, as the FDIC did in its NPV calculations, that 40 percent of all loan modifications will end in redefault, and assume loss severity ratios of 60 percent if the loan is foreclosed on immediately or 70 percent if it is foreclosed on after a redefault (to reflect the dropping home prices and potential loss of upkeep by a struggling homeowner), investors will still save money if loan modifications reduce the current present value of the loan by as much as 20 percent.

Given the lack of effective control investors exercise over servicers, it would be wrong to construe that silence as agreement with servicers’ decisions to decline modifications in favor of a chimerical cure. The large, private-label pools that contain most sub-prime loans are passive investment vehicles. Trustees, on behalf of the trust, can in exceptional cases fire a servicer, but this right is rarely invoked, usually only when the servicer is no longer able to pay the advances due on the borrowers’ monthly payments.  Thus, although servicers are nominally accountable to investors, investors are, in most cases, no more powerful than borrowers to provide direction to a servicer.

Servicers, moreover, may have different incentives than investors, and it is not clear that servicers do always make loan modification based upon the best interests of the trust as a whole.  What we know from this study is that servicers are not making modifications.  We believe that more modifications could be made that would serve the interests of both investors and homeowners, as well as the national economy.

As Professor Alan White noted in his testimony last week before a House subcommittee, and as the authors acknowledge, there may be compelling public policy reasons to increase the number of modifications. Foreclosures impose high costs on families, neighbors, extended communities, and ultimately our economy at large.  It would be short-sighted indeed to fail to act.

HAMP is a significant step forward from previous loan modification programs. Yet the program has significant limitations both in design and implementation. HAMP’s ability to guarantee an increase in sustainable modifications is dependent on voluntary servicer participation in the program.

Several large servicers are still not participating, and the patchwork coverage is confusing to homeowners and their advocates alike.

More seriously, homeowners have no leverage to obtain a HAMP loan modification from even a participating servicer.  It is unclear if the Administration’s compliance efforts will be able to detect and remedy servicer noncompliance.

Problems with Servicers’ Implementation of HAMP Plague Homeowners Seeking Loan Modifications.

Servicers’ compliance with HAMP is, at best, erratic.  There is widespread violation of the HAMP guidelines across many servicers.  The lack of compliance arises in part from obvious and persistent short falls in staffing and training.  Yet some of the violations of HAMP are embodied in form documents, perhaps reflecting a more conscious attempt to evade the HAMP requirements.  Lack of transparency prevents homeowners from identifying violations.  Lack of accountability prevents homeowners from obtaining any redress when violations are identified.

Participating servicers violate existing HAMP guidelines.

Waivers of claims and defenses are still being required by servicers.

The HAMP rollout language prohibits waivers of legal rights. Yet servicers still are seeking waivers from homeowners or an admission of default.  We have learned of many instances in which servicers require homeowners to waive all claims and defenses in order to obtain a loan modification or even a loan modification review.  Servicers also have asked homeowners to waive their right to a HAMP loan modification review in favor of a non-HAMP loan modification.  Not only does this violate HAMP rules but it demonstrates bad faith.  Some servicers also are requiring homeowners to sign a waiver that states that any HAMP loan modification will be suspended if the homeowner subsequently files for bankruptcy.  These are form documents and thus unlikely to represent a random mistake by a line-level employee.

Some participating servicers offer non-compliant loan modifications.

All homeowners who request a HAMP review are entitled to one. Homeowners may elect a non-HAMP modification, but that should be the borrower’s choice, informed by disclosure of all modification options.

Nonetheless, some servicers have told homeowners that they are providing a HAMP modification, only to provide documents that do not comport with the HAMP guidelines. These loan modifications are usually significantly less sustainable than a HAMP modification would be and often have higher costs.

In addition to the waiver issue discussed above, advocates have been told that homeowners must pay large advance fees before a modification will be considered, homeowners have been required to complete hefty repayment plans before a review is conducted, and homeowners have been offered, as HAMP modifications, modifications limited to five years, with no limitation on interest rate increases after that time.

Aurora, for example, represented to one advocate that it does not have the “right documents,” although they have been publicly available for months, and so instead offered the borrowers old forms that contain waivers and are otherwise not HAMP compliant.  Select Portfolio Servicing has insisted that a New York borrower make payments at a 44 percent debt-to-income ratio instead of the 31 percent mandated by HAMP.

Some participating servicers refuse to offer HAMP modifications.

The HAMP servicer contracts require that participating servicers review all homeowners in default for HAMP eligibility and that any borrower who requests a HAMP review be granted one, even if the borrower is not yet in default.  Homeowners not yet in default but who are at imminent risk of default are eligible for a HAMP modification.  Servicers may only refuse to perform a HAMP review if the pooling and servicing agreement (PSA) forbids modification.  In that case, servicers are still expected to use all reasonable efforts to obtain an exception to the PSA.

Staff at some participating servicers routinely refuse to do HAMP loan modifications.  For example:

1. In a New York case, the employee stated that the investor did not permit loan modifications, yet refused to produce a copy of the PSA or even identify the investor, much less attempt to obtain a release from the restrictions as required by HAMP.
2. One California advocate pursuing a HAMP modification for a loan serviced by Wells Fargo was told repeatedly that the holder did not do modifications. After protracted discovery, the servicer identified the holder as Wells Fargo Home Mortgage.  Wells Fargo Home Mortgage, of course, is owned by Wells Fargo Bank, a participating servicer under HAMP.
3. In another case, a Select Portfolio Servicing representative said that the PSA prevented a HAMP modification, but could not provide the PSA due to “system errors.”
4. Other times servicers tell homeowners that they are not participating or that they are only participating for GSE loans.
5. Bank of America has told homeowners in both Pennsylvania and Florida that it is only modifying loans that are owned by the GSEs.  Bank of America is a participating servicer under HAMP and therefore required to evaluate all loans for modification under HAMP.
6. Some servicers have asserted that loans held by the GSEs require a higher debt-to-income ratio than HAMP, despite the implementation of nearly identical programs by both Fannie Mae and Freddie Mac.
7. Advocates in both Ohio and Florida have been driven to file court documents to compel Wells Fargo to do a HAMP review and stay foreclosure proceedings, after Wells Fargo failed to complete a HAMP review.
8. Bank of America informed an advocate that future HAMP modifications are put on hold while Treasury reviews Bank of America’s version of the Net Present Value calculation.
9. Other advocates and homeowners have been told more generally that their servicer is participating but that the servicer does not yet have a program to evaluate homeowners for HAMP.  Ocwen, for example, told an advocate on July 1 that it did not know when it would be rolling out its HAMP modifications.  Ocwen signed a contract as a participating servicer on April 16, two and a half months earlier.
10. One Brooklyn, New York advocate was told that the investor was not allowing any modifications because they were waiting for the federal government to act.

In the meantime, of course, foreclosures continue.

Servicers charge fees to homeowners for the modification.

HAMP forbids any upfront payments as a precondition to review or trial modification. Several homeowners have reported being told by various servicers that they must make payments before being considered for HAMP.  Sometimes these payments take the form of a special forbearance agreement or lump-sum payment of arrearages; other times it is less clear what the payment is for.

1. A Bank of America loss mitigation representative informed a Pennsylvania homeowner’s counsel that if the homeowners paid $2,200.00 to Bank of America, then Bank of America would “consider” a loan modification.
2. America’s Servicing Company, a division of Wells Fargo Home Mortgage, told a New York borrower that only upon completion of a three month repayment plan, followed by a balloon payment of $18,000, could the borrower be considered for HAMP.
3. Select Portfolio Servicing representatives demanded a payment in the amount of the original mortgage payment in order to enter the trial period agreement in order to demonstrate the borrower’s “good faith.”

Servicers are continuing to initiate foreclosures and sell homes at foreclosure sales while the HAMP review is pending.

HAMP requires that no foreclosures be initiated and no foreclosure sales be completed during a HAMP review, although existing foreclosure actions may be pursued to the point of sale.  Reports from around the country indicate that servicers are routinely placing homeowners into foreclosure during a HAMP review and, far worse, selling the home at foreclosure while the homeowner is waiting on the outcome of the HAMP review.

Servicers often negotiate loan modifications on a separate track from the personnel pursuing foreclosure. This structure results in homeowners being placed in foreclosure, and being subject to a foreclosure sale, while HAMP review is occurring.

Homeowners encounter numerous bureaucratic barriers in attempting to negotiate a loan modification.

Homeowners’ loan files are routinely lost.  Counselors report waits of months to hear back on review for a trial modification.

In one case, Select Portfolio Services advised counsel for a New York borrower on three separate occasions over six weeks that the necessary broker price opinion had been cancelled due to “system errors” and a new request would have to be submitted.

A Florida homeowner had his HAMP trial modification cancelled by Citimortgage for non-compliance, despite having submitted all required documents and payments as required, only to receive a HAMP solicitation letter the same day.  His lawyer, in describing the situation to us, wrote, “It is driving the poor guy bananas.”

To add insult to injury, homeowners are expected to return the documents within days of receipt. Homeowners in both New York and Florida have reported receiving the trial modification agreements the same day the servicer required their return.  One Illinois homeowner received her trial modification agreement three days after she was required to return the agreement.

Staff of participating servicers continue to display alarming ignorance of HAMP.

Staff of participating servicers have told homeowners that HAMP does not exist.  Several homeowners have reported being told to contact HUD since HAMP is a government program.

HUD, of course, does not administer HAMP; participating servicers do.  Bank of America apparently told the homeowners in one case that they were not eligible for HAMP because they were not in default.  This misinformation was given to the homeowner despite the fact that servicers are given an additional $500 incentive payment for modifying a loan prior to default.

In another case, Bank of America refused to modify a first lien position home equity line of credit, apparently under the belief that modifications of home equity lines of credit were banned as second liens, whether or not they actually were junior liens.

In one case, Select Portfolio Servicing (SPS) claimed that it could only take 80% of the applicants’ gross income into consideration, regardless of HAMP guidelines and that the clients would have to reduce their debt obligations by $300 to be considered for a modification.  The representatives appeared to be operating under SPS’s standard screening process for non-HAMP modifications and were not familiar with the HAMP standards.

In the same case, another SPS representative claimed that the investor on the loan would only allow for payment modifications at 44 percent debt-toincome ratio, not the 31 percent mandated by HAMP.  In many cases, it is not clear if staff are applying the net present value test or if they are applying it correctly.

A recent blurb from Mortgage Servicing News Bulletin captures the problem: “Confused About the Rescue Plan?” Apparently many servicers are.

Non-participating servicers continue to represent themselves as participating in HAMP.

Some servicers give conflicting information on whether or not they participate in HAMP.  American Home Mortgage Servicing, for example, conveyed on its web site, automated answering service, and through its loan modification staff that it was a participating servicer under HAMP.  Yet at least some of the loan modifications it offered were not HAMP-compliant, nor is it, as of July 13, 2009, listed as a participating servicer.

Lack of transparency is resulting in summary denials and other unreasonable acts by servicers.

Even when servicers do a HAMP review, they sometimes use the wrong numbers, which advocates are only able to uncover after a protracted battle.

In one case involving a New York borrower, Select Portfolio Servicing representatives initially advised that the clients were ineligible for a HAMP loan modification, based on their budget.  When asked for clarification about the grounds for this determination, SPS representatives claimed that the clients’ expenses exceeded their income, making it impossible for them to afford their mortgage.  Upon further discussion, it was revealed that SPS was using the clients’ original mortgage payment as an input value for these calculations, rather than the proposed modified payment amount that would have made their mortgage affordable.

Some servicers are scrutinizing homeowner expenses and using back-end ratios as a basis for denying HAMP loan modifications.  Back-end ratios, the ratio between all of the borrowers’ fixed monthly obligations and income, should not disqualify a borrower under HAMP unless the reduced payment will cause the borrower severe financial hardship; instead, homeowners with back-end ratios above 55 percent are to be referred to HUD-certified housing counselors. In other cases, homeowners are turned down for loan modifications without any explanation.

Servicers refuse to provide the final payment amounts even when the borrower provides all verified information before the beginning of the trial modification period.  In one case, three days after the servicer had supplied the borrower with the first set of trial modification documents and nearly two months after the borrower had submitted verified income information, the servicer increased the monthly payment amount, without any apparent justification.

The permanent modifications offered often include arrears that are undocumented and apparently overestimated.  While HAMP permits arrearages and some fees to be capitalized, HAMP does not permit unpaid late fees to be capitalized.   Given the widespread practice by servicers of padding fees in foreclosure or bankruptcy, homeowners and their advocates have good reason to seek review of the legitimacy of the fees.

Some servicers claim they are doing a large volume of modifications for homeowners not eligible for HAMP, as well as many HAMP loan modifications.  Whether or not the homeowners with the non-HAMP modifications were in fact eligible for HAMP is uncertain.   Some servicers are requiring homeowners to waive their eligibility for a HAMP review in order to obtain any modification.

The lack of public accountability makes it impossible to know how many of those reported as ineligible for HAMP were, in fact, ineligible, and how many were simply steered away from HAMP modifications.

In addition, determining whether or not any individual servicer is or is not participating is not trivial.  As discussed above, some servicers represent themselves on their websites as participating, but fail to provide any HAMP review.  As discussed below, confusion as to coverage of affiliated servicers is widespread.

Certain HAMP Policies Must Be Changed to Provide Sustainable Modifications and Save Communities.

1. Transparency must be improved.

The NPV model for qualifying homeowners must be available to the public.

A homeowner’s qualification for a loan modification under HAMP is determined primarily through an analysis of the Net Present Value (“NPV”) of a loan modification as compared to a foreclosure.  The test measures whether the investor profits more from a loan modification or a foreclosure.  Most investors require that servicers perform some variant of this test prior to foreclosure.  The outcome of this analysis depends on inputs including the homeowner’s income, FICO score, current default status, debt-to-income ratio, and property valuation, plus factors relating to future value of the property and likely price at resale. Participating servicers are required to apply this analysis to all homeowners who are 60 days delinquent and those at imminent risk of default. Homeowners and their advocates need access to the program to determine whether servicers have actually and accurately used the program in evaluating the homeowner’s qualifications for a HAMP modification.

Without access to the NPV analysis, homeowners are entirely reliant on the servicer’s good faith.

The lack of NPV transparency makes servicer turndowns hard to counteract.  NPV turndowns must be detailed and in writing, and based on a transparent process that conforms to HAMP guidelines.

The layers of documents governing HAMP, the guidelines, the Supplemental Directives, the various FAQ’s, and the servicer contracts, should be consolidated, reconciled, and clarified.

Homeowners, their advocates, and servicers have no one source of guidance on HAMP. The initial guidelines differ slightly from the Supplemental Directives, and the FAQs provide different interpretations.

Participating subsidiaries must be clearly identified

Participating servicers may, but need not, require their subsidiaries to participate, so long as the subsidiary is a distinct legal entity.  However, if the subsidiary is not a distinct legal entity, then the subsidiary must participate.  The public list of participating servicers still does not make these distinctions clear.

One example of the confusion is Wells Fargo.  On financialstability.gov, Wells Fargo Bank is listed as a participating servicer. Wells Fargo Bank, N.A., is, according to the National Information Center maintained by the Federal Reserve, the parent company of Wells Fargo Home Mortgage. The contract posted on financialstability.gov variously represents the covered servicer as Wells Fargo Bank, N.A. (when giving the address for notices) and Wells Fargo Home Mortgage, a division of Wells Fargo Bank, N.A. (above the signature lines).

Does this contract mean that both Wells Fargo Bank, N.A., and Wells Fargo Home Mortgage are covered? And is America’s Servicing Company, a division of Wells Fargo Home Mortgage also covered?  The answer to both questions appears to be yes but has not been uncontested.  Asking homeowners and counselors to wade through these legal relationships invites confusion and frustration.

Mechanisms for enforcement and compliance should be adopted.

All foreclosure proceedings must be stopped upon the initiation of a HAMP review, not just at the point before sale.

While many servicers are placing homeowners in foreclosure and proceeding to sale in violation of HAMP guidelines (as described above), even compliance with the current rule is pushing homeowners into costlier loan modifications and tilting the scales toward foreclosure. In judicial foreclosure states, servicers are aggressively pursuing foreclosures while reviewing homeowners for loan modifications. As a result, homeowners are incurring thousands of dollars in foreclosure costs.

Servicers either demand these payments upfront (an apparent violation of HAMP) or capitalize the costs without permitting any review by the homeowner. In either event, these costs make it harder to provide an affordable loan modification and the continuation of the foreclosure causes homeowners great stress. All foreclosure proceedings should be stayed while HAMP reviews occur.

Staying the foreclosures during the pendency of a HAMP review would encourage servicers to expedite their HAMP reviews, rather than delaying them.

Homeowners should be provided with an independent review process when denied a loan modification.

It seems unlikely that all servicers will always accurately evaluate the qualifications of every homeowner who is eligible for HAMP.  Homeowners who are wrongly denied must be afforded an independent review process to review and challenge the servicer’s determination that the borrower does not qualify for HAMP.

Homeowners should have access to an ombudsman to address complaints about the process.

Homeowners currently have no resource for addressing complaints, whether with a servicer’s failure to return phone calls or offer of a non-compliant modification.  Any forum for addressing homeowners’ complaints must adhere to time lines for addressing complaints and provide public accounting as to the nature of the disputes and their resolution.

Denials based in part on a borrower’s credit score should be accompanied by an adverse action notice under the Fair Credit Reporting Act.

The Fair Credit Reporting Act requires that if an adverse action in the provision of credit is taken based in part on the borrower’s credit score that the borrower be advised of that adverse action and of the credit score upon which the decision was based.  The reason for that requirement is that credit scores often have errors, which a borrower may correct—but only if the borrower is aware of the error.

The Net Present Value test relies on credit scores to determine default and redefault rates.  It is at least possible that those credit scores could result in the failure of the NPV test and the denial of a loan modification.  Absent full transparency regarding the NPV calculation, homeowners are unlikely to know of the program’s reliance on their FICO score or, if they do, whether or not their FICO score was the cause of their denial for a HAMP modification.  An adverse action notice alerts homeowners to the possibility that an incorrect FICO score—which could be corrected—might be the reason their servicer denied a HAMP modification.  Without an adverse action notice homeowners have little opportunity to address any potential problems.

Homeowners in bankruptcy should be provided clear access to the HAMP program.

As a result of the HAMP guidelines providing servicer discretion on whether to provide homeowners in bankruptcy access to HAMP modifications, homeowners generally are being denied such modifications.  In at least one instance, a servicer is reported to have refused a modification on the basis of a former bankruptcy, a clear violation of the HAMP guidance.

The HAMP guidelines should provide clear guidance on instances where a loan modification should be provided to homeowners in bankruptcy. The HAMP guidelines should explicitly provide that servicers must consider a homeowner seeking a modification for HAMP even if the homeowner is a debtor in a pending bankruptcy proceeding.

Some servicers have explained their reluctance to do loan modifications in bankruptcy by citing a fear of violating the automatic stay in bankruptcy.  Neither the automatic stay nor the discharge order should be a bar to offering an otherwise eligible homeowner a loan modification.  HUD, in recent guidance to FHA servicers, has explicitly recognized that offering a loan modification does not violate the automatic stay or a discharge order.

Servicers should be required, upon receipt of notice of a bankruptcy filing, to send information to the homeowner’s counsel indicating that a loan modification under HAMP may be available.  Upon request by the homeowner and working through homeowner’s counsel, servicers should offer appropriate loan modifications in accordance with the HAMP guidelines prior to discharge or dismissal, or at any time during the pendency of a chapter 13 bankruptcy, without requiring relief from the automatic stay, and, in the case of a chapter 7 bankruptcy, without requiring reaffirmation of the debt. The bankruptcy trustee should be copied on all such communications.

All loan modifications offered in pending chapter 13 cases should be approved by the Bankruptcy Court prior to final execution, unless the Court determines that such approval is not needed. If the homeowner is not represented by counsel, information relating to the availability of a loan modification under HAMP should be provided to the homeowner with a copy to the bankruptcy trustee. The communication should not imply that it is in any way an attempt to collect a debt.

Two changes to the modification rules should also be made to facilitate access for homeowners in bankruptcy.  First, the payment rules should take into account the fact that payments may be passed through the bankruptcy trustee, rather than directly from homeowner to servicer.  Supplemental

Directive 09-03 requires that the servicer receive a payment by the end of the first month that the trial plan is in effect.  If the servicer does not receive the payment, the trial modification is terminated and the homeowner is disqualified from a permanent modification under HAMP.

There is often an initial lag between passing the payments from the bankruptcy trustee to the servicer; homeowners should not be penalized for a delay over which they have no control and which is occasioned solely by their exercise of their right to file bankruptcy. Second, the modification documents should explicitly prohibit servicers from requiring homeowners to reaffirm mortgage debts. Although the guidance and supplemental directive appear to allow homeowners not to reaffirm in bankruptcy, the form modification agreement requires reaffirmation by its terms in paragraph 4E.

The modification agreement should be amended to restate explicitly that the borrower does not waive any claims by entering into the modification and that no reaffirmation of the debt is required. Because reaffirmations of home mortgages have the potential to deny homewners a fresh start, many bankruptcy judges refuse to approve them. Congress recognized this concern with an amendment to the Bankruptcy Code in 2005 that permits mortgages to be serviced in the normal course after bankruptcy even if the mortgage has not been reaffirmed.

These purported reaffirmation agreements made outside the mandatory notice and review procedures of section 523( c) and (d) of the Bankrutpcy Code have no effect, are not enforceable, and the government should not be involved in encouraging the practice.

Mortgages should remain assumable as between spouses, children, and other persons with a homestead interest in the property.

Federal law, the Garn-St Germain Depository Act of 1982, specifically forbids acceleration when the property is transferred from one spouse to another and permits a spouse or child to assume the mortgage obligations.  Such transfers are most likely to occur upon death or divorce. They may also occur in the context of domestic violence.

Freddie Mac has long allowed mortgage assumptions by relatives as one method of working out delinquent mortgages. Following these policies, the HAMP program should allow mortgages for certain homeowners to be assumable.  Homeowners who have recently suffered the death of a loved one should not find themselves immediately faced with foreclosure or suddenly elevated mortgage payments.

Fair lending principles must be ensured throughout the HAMP process.

Incentive payments for pre-default homeowners are aimed at the necessary policy of ensuring that homeowners already facing hardship obtain sustainable loans, yet the additional funds for such reviews may implicate fair lending issues.  The home price decline protection program may result in payments focused more on non-minority areas and should be reviewed for fair lending concerns.

Servicer incentive payments based on reductions in the dollar amount of a payment also may raise fair lending considerations. Moreover, hardship affidavits and paperwork must be made available in appropriate languages to ensure wide access to the program. Data on loan modifications and applications are essential to ensuring equitable access to the program; these data must all be available as of fall 2009.  Any further delay will limit transparency and delay accountability.

HAMP application procedures should better recognize and lessen the impact of exigent circumstances.

Aspects of the loan modification procedures, or gaps in current guidance, create hurdles for certain homeowners.  For example, victims of domestic violence are unlikely to be able to obtain and should not be required to obtain their abuser’s signature on loan modification documents.  While predatory lending and predatory servicing can create default and an imminent risk of default, as recognized by the HAMP plan, the hardship affidavit does not contain an explicit reference to either category.

Thus, at present, a loan modification would be available only to a homeowner who realizes that the fraud and predatory behavior that resulted in unreasonable levels of debt are legitimate grounds for seeking a modification and who is able to articulate and defend that categorization to a line-level employee of the servicer who may be relying in a formulaic way on the categories contained in the hardship affidavit or may be outright hostile to claims of predatory behavior.

The trial modification program should be further formalized and clarified, such that homeowners receive assurances of the terms of the permanent modification and homeowners are not put into default on their loans if they are current at the onset of the trial modification.

The trial modification program currently complicates matters for participating homeowners by increasing costs and failing to maximize the chances for long-term success.  Moreover, by binding homeowners but not servicers, it may further discourage some homeowners from participating.

Payments received during the trial modification period should be applied to principal and interest, not held in suspense until the end of the trial period.  Trial modification payments should be applied as if the modification, and any capitalization, occurred at the outset of the trial period, with payments allocated accordingly between principal and interest.

The policy of capitalizing arrears at the end of the modification period, including any difference between scheduled and modified payments, penalizes homeowners (including those not in default at the time of the trial modification) by raising the cost of the modification and increasing the chances that some homeowners will not pass the NPV test. The use of suspense accounts and capitalizing arrears after the trial period render meaningless the term “modification” in “trial modification.”

In addition, homeowners who are not delinquent at the start of the trial period and who are making payments as agreed under the trial plan currently are reported to credit bureaus as making payments under a payment plan; this may register as a black mark against their credit.  Homeowners should not face decreased credit scores simply because they are seeking to attain a responsible debt load.

For homeowners in bankruptcy, the new rules defining when trial payments are “current” fail to take into account the delay in initial disbursement that may occur when payments are made through the Chapter 13 trustee.

Finally, homeowners need some assurance at the time of the trial modification that, if their income is as represented upon approval of the trial modification, the servicer will provide a final modification on substantially similar terms.  Homeowners are bound by the trial modification; it is not clear that servicers are.

The borrower is required to sign the trial modification documents, but the servicer is not. This one-sided contract discourages some homeowners and advocates.  Homeowners may decide that the costs of a trial modification—the capitalized interest, the sunk payments, the potential adverse credit reporting—are not worth the uncertain benefit of a permanent modification.  Some servicers compound this problem by telling homeowners seeking modifications that they are under no obligation to offer a permanent modification.

Indeed, the trial modification agreement itself, in paragraph 2F, appears to allow servicers to choose not to complete a permanent modification.  According to paragraph 2F, homeowners are not entitled to a permanent modification if the servicer fails to provide the borrower with “a fully executed copy of this Plan and the Modification Agreement.”  Should a servicer fail to provide the borrower with a fully executed copy, the borrower is left without a permanent modification and without any recourse, while the servicer may then retain the payments made and proceed to a foreclosure.

Faced with this uneven exchange, many homeowners will rationally refuse to complete a trial modification, even if they would qualify for and benefit from a permanent modification.

The final modification agreement should make clear that the homeowners do not waive any rights nor are required to reaffirm the debt in order to enter into the modification.

Although the HAMP guidelines prohibit waiver of claims and defenses, the language in paragraph 4E of the modification agreement, “that the Loan Documents are composed of duly valid, binding agreements, enforceable in accordance with their terms and are hereby reaffirmed,” could be construed as a waiver of some claims, particularly claims involving fraud in the origination or execution of the documents.

In addition to the problems posed by reaffirmation of the debt in bankruptcy, reaffirmation of the debt and loan documents outside of bankruptcy could be construed as a waiver of defenses to the debt.  Servicers, as discussed above and demonstrated by the attachments, are seeking even stronger waivers of legal rights; the form documents should give such unauthorized behavior no shelter.  The modification agreement should clearly state that the borrower does not waive any claims and defenses by entering into the agreement and that the borrower is not required to reaffirm the debt.

Benchmarks for Performance, Mandatory Loan Modification Offers, and Other Servicing Reforms Should Be Required If the Program Does Not Produce Sufficient Results in Short Order.

Creating affordable and sustainable loan modifications for distressed homeowners is labor intensive.  It is no surprise, then, that servicers continue to push homeowners away from HAMP loan modifications or delay the process substantially.

Initial data collection will make a more exact review of the HAMP program possible within the next few months.  Freddie Mac already is engaged in substantial oversight.  Our work nationwide on behalf of homeowners facing foreclosure and unaffordable loans tells us that many qualified homeowners are being unnecessarily turned away from HAMP, those receiving loan modifications often obtain terms quite different from HAMP, and even the HAMP-compliant modifications are limited in what they can do for homeowners with high loan principals.

We anticipate that the data will reflect the experience of hundreds of homeowners and their advocates, showing that the program is too narrow and too hard to implement. When the data substantiates our necessarily impressionistic description of the failures of HAMP, Congress should enact legislation to mandate loan modifications where they are more profitable to investors than foreclosure. Loss mitigation, in general, should be preferred over foreclosure.

Additionally, Congress should revisit the question of bankruptcy relief.  First-lien home loans are the only loans that a bankruptcy judge cannot modify.  The failure to allow bankruptcy judges to align the value of the debt with the value of the collateral contributes to our ongoing foreclosure crisis.

While the Real Estate Settlement Procedures Act currently requires servicers to respond to homeowners’ request for information and disputes within 60 days, in practice many such inquires go unanswered. Despite this failure to respond, servicers are still permitted to proceed to collection activities, including foreclosure. Essential changes to this law governing servicers should ensure that homeowners facing foreclosure would no longer be at the mercy of their servicer.

There should be transparency in the servicing process by allowing the homeowner to obtain key information about the loan and its servicing history.  Servicers should be prohibited from initiating or continuing a foreclosure proceeding during the period in which an outstanding request for information or a dispute is pending.

In Conlcusion (Hers…)

Thank you for the opportunity to testify before the Committee today.  The foreclosure crisis is continuing to swell. We are drowning in the detritus of the lending boom of the last decade. The need to act is great.  The HAMP program must be strengthened. Homeowners who qualify must have the right to be offered a sustainable loan modification prior to foreclosure. Passage of legislation to allow for loan modifications in bankruptcy, to reform the servicing industry, and to address the tax consequences of loan modifications also would aid in protecting homeowners from indifferent and predatory servicing practices and reducing the foreclosure surge. Together, these measures would save many homes and stabilize the market.  We look forward to working with you to address the economic challenges that face our nation today.

In Conclusion… (Mine…)

Now… tell me again that I don’t need an attorney, along with other experts, to obtain a viable loan modification from my servicer.  Tell me again that loan modifications are free and all I have to do is call my bank directly… go ahead… tell me… tell me again that the bank is going to help me save my home from foreclosure… go ahead… tell me.

But after you do… just don’t ask me to vote for you again… ever.