MY SWAN’S SONG: Testimony Before the United States Senate on the State of Foreclosures & Loan Modifications
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.Â Her written testimony, which included 79 footnotes and 28 pages of exhibits, ran 55 pages in length and was titled: â€śPreserving Homeownership: Progress Needed to Prevent Foreclosuresâ€ť.
Ms. Thompson is an attorney, currently of counsel to the National Consumer Law Center (NCLC).Â During her tenure at NCLC she has provided training and support to hundreds of attorneys representing homeowners from all across the country.Â 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.Â 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, â€śwhen it was clearly in an investorâ€™s best interests.â€ť
Her testimony was given on behalf of the National Consumer Law Centerâ€™s low-income clients, and on behalf of the National Association of Consumer Advocates.Â She explained that on a daily basis, â€śNCLC provides legal and technical assistance on consumer law issues to legal services, government and private attorneys representing low-income consumers across the country.â€ť
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 Barâ€™s support of Californiaâ€™s Senate Bill 94 and Assembly Bill 764, that is about to cause irreparable harm to homeowners, the legal profession, and Californiaâ€™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.Â Having personally interviewed more than 50 attorneys currently involved in representing homeowners seeking loan modifications, the Barâ€™s view is not supported by any of the attorneys with whom Iâ€™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.Â Diane Thompsonâ€™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 whatâ€™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.Â Up until recently, it was widely believed that the Obama administrationâ€™s plan was working as described and as agreed to by participating lenders and servicers.Â 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.Â 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.Â Homeowners have been ignored, mistreated, and lied toâ€¦ but by their lenders and servicers more than any other.Â 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.Â Servicers and lenders, it should be remembered, donâ€™t provide a place to lodge oneâ€™s complaint.
On August 5, 2009, the Obama administration released â€śreport cardsâ€ť showing the relative performance, or lack thereof, of lenders and servicers under the Making Home Affordable program.Â 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.Â The following chart shows the administrationâ€™s report card for the eight largest mortgage serivcers:
Bank of America
What follows has been excerpted without modification from the July 2009 testimony of attorney Diane Thompson.Â I will happily provide my readers with a copy of Dianeâ€™s testimony in its entirety upon request.Â 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.Â And when I finished, I sat there and I cried.Â Itâ€™s been a long roadâ€¦ and I pray that this document at the very least sets some part of our government on a course to understanding that our nationâ€™s interests are not shared, nor are they aligned with the interests of mortgage servicers. Â That their lobbying influence cannot be allowed to buy us into a depression. Â And thatâ€¦ Homeowners Need Help.
Over the last few months, many of you have asked me what you can do to help the cause Iâ€™ve taken on, and now Iâ€™d like to answer you:
Send a copy of this paper to the California Bar Associationâ€¦ to the Governorâ€™s Officeâ€¦ to Attorney General Brown… to your state and federal representatives. Â Let them all receive hundreds of copies. Â Let them know you’re paying attention. Â Perhaps then theyâ€™ll have no choice but to read what attorney Diane Thompson had to say less than one month ago.Â Send it to everyone you know whoâ€™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 youâ€¦ for everything…
Chairman Dodd, Ranking Member Shelby, and members of the Committee, thank you for invitingÂ me to testify today regarding the barriers encountered by homeowners attempting to access theÂ 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.Â 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.Â 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 Servicersâ€™ 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 FAQâ€™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 borrowerâ€™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.Â At the end of the first quarter of 2009, more than 2 million houses were in foreclosure.Â Over twelve percent of all mortgages had payments past due or were in foreclosure and over seven percent were seriously delinquentâ€”either in foreclosure or more than three months delinquent.
These spiraling foreclosures weaken the entire economy and devastate the communities in whichÂ they are concentrated.Â 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 borrowerâ€™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 Whiteâ€™s data shows that, in the aggregate, modifications increase the principal balance.Â 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 byÂ HAMP.Â 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 millionÂ 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.Â Servicers are all too often refusing to do HAMP modifications, soliciting a waiver of homeownersâ€™ 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 moneyâ€”or lose it in the same amounts or on the same scaleâ€”when an investor loses money.Â 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.Â 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 ofÂ loan modifications would cost servicers upfront money in fixed overhead costs, including staffing and physical infrastructure.
Servicersâ€™ 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 homeownersâ€™ 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 mailÂ Warns: â€śIf you leave more than one message, you will be put at the end of the list of people we callÂ back.â€ť
Recent industry efforts to â€śstaff-upâ€ť loss mitigation departments have been woefully inadequate.Â As a result, servicers remain unable to provide affordable and sustainable loan modifications on the scale needed to address the current foreclosure crisis.Â 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.Â Under many current pooling and servicing agreements, additional labor costs incurred by servicers engaged this process are not compensated by the loan owner.Â By contrast, servicersâ€™ 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 andÂ 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.Â 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.Â 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.Â 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.Â 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 â€śfloatâ€ťâ€”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. Â In normal times, when cure rates exceeded foreclosure rates, an investor would have little objection to the wait-and-see-approach.Â 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 servicersâ€™ 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 borrowersâ€™ monthly payments.Â 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.Â What we know from this study is that servicers are not making modifications.Â 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.Â 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. HAMPâ€™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.Â It is unclear if the Administrationâ€™s compliance efforts will be able to detect and remedy servicer noncompliance.
Problems with Servicersâ€™ Implementation of HAMP Plague Homeowners Seeking Loan Modifications.
Servicersâ€™ compliance with HAMP is, at best, erratic.Â There is widespread violation of the HAMP guidelines across many servicers.Â The lack of compliance arises in part from obvious and persistent short falls in staffing and training.Â Yet some of the violations of HAMP are embodied in form documents, perhaps reflecting a more conscious attempt to evade the HAMP requirements.Â Lack of transparency prevents homeowners from identifying violations.Â 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.Â 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.Â Servicers also have asked homeowners to waive their right to a HAMP loan modification review in favor of a non-HAMP loan modification.Â Not only does this violate HAMP rules but it demonstrates bad faith.Â 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.Â 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 borrowerâ€™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 â€śright documents,â€ť 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.Â 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.Â Homeowners not yet in default but who are at imminent risk of default are eligible for a HAMP modification.Â Servicers may only refuse to perform a HAMP review if the pooling and servicing agreement (PSA) forbids modification.Â 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.Â For example:
- 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.
- 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.Â Wells Fargo Home Mortgage, of course, is owned by Wells Fargo Bank, a participating servicer under HAMP.
- In another case, a Select Portfolio Servicing representative said that the PSA prevented a HAMP modification, but could not provide the PSA due to â€śsystem errors.â€ť
- Other times servicers tell homeowners that they are not participating or that they are only participating for GSE loans.
- Bank of America has told homeowners in both Pennsylvania and Florida that it is only modifying loans that are owned by the GSEs.Â Bank of America is a participating servicer under HAMP and therefore required to evaluate all loans for modification under HAMP.
- 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.
- 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.
- Bank of America informed an advocate that future HAMP modifications are put on hold while Treasury reviews Bank of Americaâ€™s version of the Net Present Value calculation.
- 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.Â Ocwen, for example, told an advocate on July 1 that it did not know when it would be rolling out its HAMP modifications.Â Ocwen signed a contract as a participating servicer on April 16, two and a half months earlier.
- 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.Â 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.
- A Bank of America loss mitigation representative informed a Pennsylvania homeownerâ€™s counsel that if the homeowners paid $2,200.00 to Bank of America, then Bank of America would â€śconsiderâ€ť a loan modification.
- Americaâ€™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.
- 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 borrowerâ€™s â€śgood faith.â€ť
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.Â 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.
Homeownersâ€™ loan files are routinely lost.Â 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 â€śsystem errorsâ€ť 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.Â His lawyer, in describing the situation to us, wrote, â€śIt is driving theÂ poor guy bananas.â€ť
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.Â 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.Â 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.Â Bank of America apparently told the homeowners in one case that they were not eligible for HAMP because they were not in default.Â 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 secondÂ 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 applicantsâ€™ 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.Â The representatives appeared to be operating under SPSâ€™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.Â 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: â€śConfused About theÂ Rescue Plan?â€ť 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.Â AmericanÂ 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.Â 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.Â When asked for clarification about the grounds for this determination, SPS representatives claimed that the clientsâ€™ expenses exceeded their income, making it impossible for them to afford their mortgage.Â Upon further discussion, it was revealed that SPS was using the clientsâ€™ 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.Â Back-end ratios, the ratio between all of the borrowersâ€™ 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.Â 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.Â While HAMP permits arrearages and some fees to be capitalized, HAMP does notÂ permit unpaid late fees to be capitalized.Â Â Given the widespread practice by servicers of padding feesÂ 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 forÂ HAMP, as well as many HAMP loan modifications.Â Whether or not the homeowners with the non-HAMP modifications were in fact eligible for HAMP is uncertain.Â Â 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.Â As discussed above, some servicers represent themselves on their websites as participating, but failÂ to provide any HAMP review.Â As discussed below, confusion as to coverage of affiliated servicers isÂ 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 homeownerâ€™s qualification for a loan modification under HAMP is determined primarily through an analysis of the Net Present Value (â€śNPVâ€ť) of a loan modification as compared to a foreclosure.Â The test measures whether the investor profits more from a loan modification or a foreclosure.Â Most investors require that servicers perform some variant of this test prior to foreclosure.Â The outcome of this analysis depends on inputs including the homeownerâ€™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 homeownerâ€™s qualifications for a HAMP modification.
Without access to the NPV analysis, homeowners are entirely reliant on the servicerâ€™s good faith.
The lack of NPV transparency makes servicer turndowns hard to counteract.Â 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 FAQâ€™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.Â However, if the subsidiary is not a distinct legal entity, then the subsidiary must participate.Â The public list of participating servicers still does not make these distinctions clear.
One example of the confusion is Wells Fargo.Â 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 Americaâ€™s Servicing Company, a division of Wells Fargo Home Mortgage also covered?Â The answer to both questions appears to be yes but has not been uncontested.Â 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.Â Homeowners who are wrongly denied must be afforded an independent review process to review and challenge the servicerâ€™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 servicerâ€™s failure to return phone calls or offer of a non-compliant modification.Â Any forum for addressing homeownersâ€™ 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 borrowerâ€™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 borrowerâ€™s credit score that the borrower be advised of that adverse action and of the credit score upon which the decision was based.Â The reason for that requirement is that credit scores often have errors, which a borrower may correctâ€”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.Â 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.Â Absent full transparency regarding the NPV calculation, homeowners are unlikely to know of the programâ€™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.Â An adverse action notice alerts homeowners to the possibility that an incorrect FICO scoreâ€”which could be correctedâ€”might be the reason their servicer denied a HAMP modification.Â 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.Â 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.Â Neither the automatic stay nor the discharge order should be a bar to offering an otherwise eligible homeowner a loan modification.Â 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 homeownerâ€™s counsel indicating that a loan modification under HAMP may be available.Â Upon request by the homeowner and working through homeownerâ€™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.Â 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.Â 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.Â 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.Â 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.Â 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.Â 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.Â 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.Â For example, victims of domestic violence are unlikely to be able to obtain and should not be required to obtain their abuserâ€™s signature on loan modification documents.Â 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.Â 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.Â 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.Â 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 â€ścurrentâ€ť fail to take into account the delay in initial disbursement that may occur when payments are made through theÂ 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.Â 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.Â Homeowners may decide that the costs of a trial modificationâ€”the capitalized interest, the sunk payments, the potential adverse credit reportingâ€”are not worth the uncertain benefit of a permanent modification.Â 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.Â According to paragraph 2F, homeowners are not entitled to a permanent modification if the servicer fails to provide the borrower with â€śa fully executed copy of this Plan and the Modification Agreement.â€ťÂ 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, â€śthat the Loan Documents are composed of duly valid, binding agreements, enforceable in accordance with their terms and are hereby reaffirmed,â€ť 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.Â 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.Â 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 OtherÂ Servicing Reforms Should Be Required If the Program Does Not ProduceÂ Sufficient Results in Short Order.
Creating affordable and sustainable loan modifications for distressed homeowners is labor intensive. Â 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.Â Freddie Mac already is engaged in substantial oversight.Â 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.Â First-lien home loans are the only loans that a bankruptcy judge cannot modify.Â The failure to allow bankruptcy judges to align the valueÂ 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 homeownersâ€™ 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.Â 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 (Hersâ€¦)
Thank you for the opportunity to testify before the Committee today.Â 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.Â 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.Â We look forward to working with you to address the economic challenges that face our nation today.
In Conclusionâ€¦ (Mineâ€¦)
Nowâ€¦ tell me again that I donâ€™t need an attorney, along with other experts, to obtain a viable loan modification from my servicer.Â Tell me again that loan modifications are free and all I have to do is call my bank directlyâ€¦ go aheadâ€¦ tell meâ€¦ tell me again that the bank is going to help me save my home from foreclosureâ€¦ go aheadâ€¦ tell me.
But after you doâ€¦ just donâ€™t ask me to vote for you againâ€¦ ever.