TOPICS > Economy

Despite Federal Aid, Lenders Slow to Modify Home Loans

August 4, 2009 at 12:00 AM EDT
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Fewer than 8 percent of eligible borrowers have successfully modified their mortgages under a $75 billion federal plan aimed at halting home foreclosures, according to a Treasury Department report. Jeffrey Kaye reports on the early struggles of the program.

GWEN IFILL: Next, are mortgage companies following through on the government’s pledge to help the homeowners in trouble? That was the focus of a new report issued by the Obama administration today. It laid out the initial results of a program to entice banks to reduce foreclosures. The response of the banks varied considerably.

Special correspondent Jeffrey Kaye has the story from Los Angeles.

JEFFREY KAYE, NewsHour correspondent: From the beginning, it seemed like an ambitious plan.

U.S. PRESIDENT BARACK OBAMA: But by making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow.

JEFFREY KAYE: A $75 billion program announced by the president in February aimed to head off home foreclosures. The government would partner with banks to reduce monthly payments for as many as 4 million at-risk borrowers.

But the program is getting off to a slow start. According to the Treasury Department report released today, so far, fewer than 8 percent of eligible borrowers have had their mortgages modified.

MICHAEL BARR, Assistant Treasury Secretary for Financial Institutions: We are not satisfied with the progress of servicers of banks in reducing foreclosure sales.

JEFFREY KAYE: Michael Barr is the Treasury Department official in charge of the Making Home Affordable program. He says participating lenders, which represent 85 percent of the mortgage market, need to improve.

MICHAEL BARR: We’re not satisfied with the pace of loan modifications. We’re not satisfied that banks are doing enough to reach borrowers in a humane way, in a fair way, in an efficient way.

JEFFREY KAYE: Today’s report shows that, since May, the 38 lenders involved in the administration’s program have modified just over 235,000 home loans on a trial basis.

But over the same period, foreclosures outstripped loan modifications by 5 to 1. That means for each home loan they modified, banks took possession of five homes.

Banks seized a record 1.5 million properties during the first six months of the year, according to RealtyTrac. A quarter of the nation’s foreclosure filings were in California.

Many housing counselors and homeowners say that working out loan modifications can be frustrating and oftentimes fruitless.

YOLANDA MCCLINTON, Los Angeles Neighborhood Housing Services: So this will be, like, the fourth time we faxed it over.

COUNSELOR: It can be a long, drawn-out process. It takes a lot of dedication and being stubborn.

JEFFREY KAYE: At Los Angeles Neighborhood Housing Services, counselors help homeowners negotiate with lenders. Around the country, government-funded agencies like this one offer free assistance. Counselors say that things are gradually picking up, but delays have been significant.

YOLANDA MCCLINTON: We can submit their information, the lenders tell me directly. In theory, it would take them maybe 45 to 60 days to process the information. In reality, it’s more like 120 to 150.

JEFFREY KAYE: Banks modify loans by either lowering interest rates or stretching out payments. Rarely do they lower the principal, the amount owed. Lenders are supposed to reduce monthly payments to no more than 31 percent of a borrower’s income. In exchange, the government pays the mortgage company $1,000 for each completed modification, plus $1,000 a year for three years if borrowers make their payments on time.

Trial modifications

Michael Barr
Assistant Treasury Secretary
We're not satisfied with the pace of loan modifications. We're not satisfied that banks are doing enough to reach borrowers in a humane way, in a fair way, in an efficient way.

COUNSELOR: They'll give you a temporary payment plan, 90 days. During that payment period, you have to show them that you can afford it. It's them giving you a test drive at a reduced payment.

JEFFREY KAYE: Because all modifications are done initially on a trial basis, borrowers have no way of knowing whether they will get a permanent modification or will end up losing their money and their home.

YOLANDA MCCLINTON: Well, we've realized the last couple of weeks that, at the end of some of these trial periods, they're not getting the mods. So we're hoping that they're not just using the trial period mod in order to collect payment and then saying no and the people could have actually used that money to help them transition.

JEFFREY KAYE: But at JPMorgan Chase, one of the nation's largest residential mortgage lenders, David Schneider says he expects most temporary modifications will become permanent. Schneider is Chase's senior executive for home lending.

DAVID SCHNEIDER, JPMorgan Chase: We don't want to own their house. We want the customer to stay in their house whenever possible. And, you know, we're going to help customers in any way possible to help stay in their house. And trial modification just is a vehicle that we think will get that done and get that done effectively.

JEFFREY KAYE: Chase has 27 new centers in 11 states to assist homeowners in trouble and to enable the bank to collect debts. The acquisition by Chase of Washington Mutual and EMC Mortgage added to its load. Chase has made more than 79,000 temporary loan modifications under the administration's program.

Schneider is proud of the bank's progress, despite criticisms.

Why are things taking so long?

DAVID SCHNEIDER: Well, I think everyone recognizes that this is a brand-new process, that it is very complicated. There's a lot of moving pieces that we all have to build. There are new systems. There are new processes. We're hiring thousands of people. We're training thousands of people. So we all understand that there's a lot to do to make this happen.

JEFFREY KAYE: But interviews with Chase customers paint a less rosy picture. Ronda Jones describes getting a trial loan modification as an ordeal.

RONDA JONES: It was extremely stressful, I mean, very, very stressful.

JEFFREY KAYE: The single mother fell behind on mortgage payments on her Los Angeles house when she lost her job. In November, she asked her lender for a loan modification.

RONDA JONES: In fact, they did not respond to my letter. Instead what I got was a notice of default in April informing me that June 30th my property would be foreclosed upon unless I made good on all of the back mortgage payments.

JEFFREY KAYE: She made the back payments, finally got a three-month trial modification, but says her worries continued.

RONDA JONES: The ordeal is not over, because I don't know exactly what they're going to offer me.

Frustration with Washington

Yolanda McClinton
LA Neighborhood Housing Services
We can submit their information, the lenders tell me directly. In theory, it would take them maybe 45 to 60 days to process the information. In reality, it's more like 120 to 150.

JEFFREY KAYE: Kiera and Grant Hoyle and their three children are in a worse position, forced to leave their Fontana, California, home after 19 months of frustrating encounters with their lender.

KIERA HOYLE: This is all January of '08.

JEFFREY KAYE: Where you're going through the request for the loan modification?


JEFFREY KAYE: And they're asking for information?


JEFFREY KAYE: They started applying for a loan modification after Grant, who is now working, was laid off. They and their bank -- now Chase -- disagree on the details, but, after repeated faxes and phone calls, the Hoyles were at first told they didn't qualify for a loan modification. Later, bank officials told them they had a reprieve.

KIERA HOYLE: Each time we spoke with them, they said, "We have terminated the foreclosure proceedings. Therefore, we're continuing to work on the loan modification negotiations. Your house will not foreclose on you."

JEFFREY KAYE: And what happened instead?

KIERA HOYLE: It foreclosed on us.

GRANT HOYLE: Foreclosed.

JEFFREY KAYE: A Chase official says the Hoyles were given ample warning, but because they did not qualify for a loan modification, they would have to move. The couple insists the foreclosure came as a surprise. Either way, the Hoyles are angry, not only with Chase, whose representative says the bank did nothing wrong, but with the government.

KIERA HOYLE: They really need to just be focusing on the families and helping them. It seems like they've done the bailout for the banks, so the banks are happy now. They're sitting nice and pretty. But now there's all these families that are trying to work this out.

JEFFREY KAYE: Complaints like theirs prompted the Treasury Department to call executives from mortgage companies to Washington last week.

MICHAEL BARR: The point that we made to the servicers in our discussion with them is that all of them have to do better. We talked about the significant variation among servicers and performance. Some servicers are doing very well in reaching out to borrowers; many other servicers are not doing enough. And we highlighted those differences.

Larger banks moving more slowly

David Schneider
We don't want to own their house. We want the customer to stay in their house whenever possible. And, you know, we're going to help customers in any way possible to help stay in their house.

JEFFREY KAYE: Today's report makes the differences public and shows some of the larger institutions have not performed as well as smaller lenders.

For example, Saxon Mortgage, a company owned by Morgan Stanley, has modified 25 percent of its delinquent mortgages, while Bank of America, with a much higher volume, has modified just 4 percent of its delinquent home loans. The Wells Fargo number was 6 percent. JPMorgan Chase came in at 20 percent.

David Schneider of JPMorgan Chase says those numbers don't tell the whole story.

DAVID SCHNEIDER: It's going to vary widely just depending on where the servicer is located and how big the servicer is. One of the things that we can't forget is that, how many customers are we actually helping? And if you look at the size of how many customers Chase has helped versus the size of our aggregate portfolio, we've performed very well.

JEFFREY KAYE: Barr would not characterize individual lenders, but promised more scrutiny.

MICHAEL BARR: We are going to be increasingly focused on the laggards, looking to see ways to further incentivize their performance. Freddie Mac, our compliance agent, will be conducting second-look reviews, auditing samples of mortgage loan applications for modification that had been denied.

JEFFREY KAYE: Government officials advised borrowers to seek free counseling to avoid foreclosure rescue scams and to try to help them negotiate with banks.

As for the Hoyles, they're temporarily moving in with relatives until they can afford the deposit on rental housing.