A look at how banks are misusing the government’s $75 billion housing program, and why it’s not working
You may have heard about the federal government’s $75 billion dollar initiative to stop the country’s foreclosure crisis. It is called Making Home Affordable, and the key component to this initiative is its loan modification program. An MHA loan modification is designed to entice the banks to reduce mortgage interest rates for their borrowers who cannot afford their house payments. And for a lot of people, getting approved for this program is the difference between keeping and losing their home. All the people who’ve seen their salaries reduced, or their hours cut, or who have lost a job and took a lower paying one because it’s the best they could find. And all the people who’ve seen their house payments spike due to some kind of feature in the mortgage they took out. That’s tons of Americans.
At my agency, the term “loan modification” has taken on almost a mythical status since the program debuted in March 2009. Clients call us pleading to know how they can be approved for the Making Home Affordable loan modification program. “Please tell me, what do I have to do to get a loan modification?” they will beg.
But it’s solely the bank’s decision which of their borrowers to approve for the program, or if they even want to participate in it at all. And from what I witness everyday, speaking to mortgage companies and listening to my clients’ tales, it becomes obvious why the Obama administration expresses anger over the banks’ use of the program, and why the administration concedes the program is not helping nearly enough people.
The spirit of the program seems to be right on the money: Lower a person’s mortgage payment in line with the amount their income dropped, or by the amount their mortgage payment has jumped. Seems simple enough.
But very few people who would actually be helped by this program are being approved for it. Think about it, the person’s transportation costs, the cost to feed their family, these costs do not shrink. For a lot of people, just having the house payment shrink isn’t enough. Many people I speak to who do get their loan modified will lose their home anyway due to other issues with their personal finances. And the unwieldy decision-making procedures employed by the mortgage companies often leave borrowers worse off than they were before they applied.
The way MHA works is, the government gives incentive money to a bank for every loan it modifies according to the stipulations of the MHA program. When a borrower applies for a modification through their mortgage company, the bank’s accountants will determine if the bank stands to make more money by accepting the government funds and modifying the loan, or by keeping the terms of the loan the same. And if they think they’ll make more money by putting their borrower in the MHA program, they’ll do it. Otherwise, they won’t. It’s as simple as that.
The purpose of this series is to illustrate how the approval process can actually make the situations of distressed borrowers worse, and what I see people endure as they navigate the approval process in hopes of realizing the treasured loan modification. It is also to show how the mortgage companies are, in fact, utilizing the Making Home Affordable program in ways that, while adhering to strict government standards, will not prevent foreclosures despite the mortgage companies keeping the government funds received for utilizing the program.
Beware the approval process
Everyday I speak to people seeking to qualify for the government’s loan modification program, which is designed to lower a mortgagee’s house payment to an amount the borrower can afford, keeping them in the home.
But some people find themselves in worse shape after applying for this program, because of the mortgage companies’ cumbersome approval process.
One such client was a man named Don. Don’s company had been bought out, and the new owners were consolidating the operations. They gave Don a choice: take a demotion and major pay cut, or keep his position, responsibilities and salary but take a job at their headquarters on the other side of the country. Don opted to leave his family in Illinois and take the job in Washington. But with an apartment and separate life in Seattle to pay for, he was struggling like crazy to keep up with his mortgage back home. So he applied for the government’s loan modification program to lower his house payment.
Don’s mortgage was up to date when he applied. He was initially approved and put on a 3 month trial period paying $700 less per month on his loan payment. The 3-month period ended up lasting six months. And halfway through the 5th month, Don was informed by his mortgage servicer that he had been denied the program after all.
Now, the bank was demanding the $700 it had not received each month during the trial period, for a total arrearage of $3,500 due immediately. Even worse, the bank had reported five late payments to the credit bureaus, and was considering the mortgage to be in default, all of which was badly damaging Don’s credit.
“They didn’t tell me any of this would happen,” Don cried. “They said I was approved. They certainly didn’t tell me that I’d have to come up with thousands of dollars if I was turned down. I mean, they’re the ones who told me to pay less. And then they wreck my credit? This is unbelievable.”
Don was in bad shape. He didn’t have $3,500 to bring the loan current. With a wife and three kids to support back home, plus his apartment, he couldn’t even afford to go on a repayment plan and pay a bit extra each month to get the loan current.
The kicker was that a $80 late fee would be assessed each month until the mortgage was made current.
“What the hell kind of program is this?” he said.
Beware the confusing language used by mortgage companies
One big problem with how mortgage companies run the Making Home Affordable approval process is their use of confusing language. Often, an applicant will be told that they are qualified or pre-qualified for the MHA loan modification, or in the case above, that they are approved for it. This often (understandably )leads the person to believe that their loan is going to be modified. It doesn’t. It simply means that the person’s situation falls within the eligibility requirements set forth by the government. The investor who owns the mortgage debt still needs to decide whether they want to actually approve it for the qualified borrower. And far more people are denied than are approved.
The approval process includes what they call a trial period, where a borrower is told to make reduced payments for what is supposed to be three months. Often these trial periods last far longer. I’ve talked to clients who have been on a trial period for a year. And at any point during the trial, the bank can suddenly decide they don’t want to modify the loan after all.
Making the situation worse, the customer service reps at the mortgage companies who field calls from applicants tend to downplay the possibility the modification will be denied. From what I hear, they paint far too rosy of a picture.
A recent client I spoke to named Sandra was crushed to learn that her mortgage company was turning down her request for a modification after months of being told she was qualified for the program.
“You should have heard them,” she said. “They told me not to worry about anything. And now they say they can’t help me and to put the house up for sale.”
I think the reason for this is simple human nature. It’s much easier to tell people what they want to hear, than it is to to explain how things could go wrong. So if you’re applying for a loan modification, remember that nothing is final until it’s in writing.
Mortgage companies lose paperwork repeatedly
As part of the approval process for an MHA loan modification, mortgage companies will require a great deal of information and paperwork from the borrower. That in itself is understandable. What is not understandable is the frequency with which mortgage companies lose the paperwork their applicants submit. This happens all the time.
And for some reason, the fax machines at mortgage companies never seem to work right. You would not believe how often I and my clients are told that some document was not received because of trouble with a fax machine.
Aside from the fax machine glitches, the phone lines also suffer frequent malfunctions. Calls to the mortgage companies routinely drop, often after a long time waiting on hold.
All of this would almost be comical if my client wasn’t in danger of losing their home.
Be prepared to wait for an answer
And the approval process for Making Home Affordable can take a very long time. Some of my clients have been waiting for an answer on their loan modification application for over a year. This is very important to keep in mind if you are applying for MHA. Do not expect a quick answer.
The reason (I assume) it takes the banks so long to make a decision whether to approve a borrower for MHA, is because the amounts of money involved are huge. The bank is not going to make a quick decision so that their borrower can stop worrying and sleep at night. They do not care about that. They only care about their profits. Expecting a bank to be concerned about anything besides its bottom line is like expecting a flea to be concerned about whether its presence is making the dog it lives on itch.
This is a major problem with the MHA approval process. A common statement I hear from my clients goes something like this: “I can’t keep making this payment anymore. If they can’t lower the payment then fine, but they need to tell me, otherwise I’m throwing money at something I’m just going to lose anyway.”
The mortgage companies are extremely unforgiving
Here is another thing to keep in mind if you are applying for Making Home Affordable: It is vitally important to follow your mortgage company’s instructions to the letter. Do not do anything they do not tell you to do. Do not deviate from their instructions.
One client of mine, John, was told he would be put on a trial modification period beginning July 1. He was told to submit his monthly payment of $875–$400 less than his normal payment–by the first of every month. John’s loan was five months past due, and he had some extra money available from his tax refund. So he sent his mortgage company $600 to go toward the past due amount as a show of good faith. This was in mid-June, right after he was informed about his acceptance onto the trial period. Understandably, John thought his mortgage company would view this as a sign of initiative on his part, that he was serious about getting the loan current and keeping his home. Unfortunately, the mortgage company didn’t see it that way. They kicked him off the program for not following their instructions, and told him he was being denied the loan modification. John was out of luck.
Why would a business view their client sending them money as a bad thing? I don’t know. I can only assume it is because these banks are gigantic multinational corporations. The sheer size of these banks requires they institute beauracratic processes that produce miles of red tape, and these processes and procedures take away any decision making power from all but a select few in the organization.
So remember, if you are looking for assistance from your mortgage lender, only do just what you are told. When it comes to the lending business, sometimes up is down and black is white. We are through the looking glass indeed.
Banks are misusing the Making Home Affordable program
Lastly, I want to discuss how the banks misuse the Making Home Affordable program. I talk to people all the time who are approved for an MHA loan modification, but because of extenuating circumstances in their finances, these people will still not be able to afford their home, and will end up losing it even though their payment has been reduced, and the bank gets the government incentive money.
It is rather widespread. If I had to put a number on it, I would estimate that maybe half of the people I speak with who see their loans modified under MHA will actually be able to afford the house. A great many people cannot afford even their new lower payment. It’s because of other extenuating costs, such as high utility bills, high health insurance or prescription costs, and high debt payments to other creditors. Very often, we will put together their budget, and their monthly cost of living still totals more than their income, even after seeing their mortgage modified and their house payment reduced to the government stipulated 31 percent of monthly gross income.
For example, one client saw her payment reduced from $2,100 per month to only $1,000 per month–a gigantic savings. But when we put together her monthly budget, her living expenses and debt payments totaled $110 more than her income. And that was just those costs she knew she would have every month–things like car payment, transportation, utilities, etc. We didn’t factor in anything for clothing, flat tires, Christmas presents, nothing.
Below is a look at her household budget:
$1,000 – house payment
$450 – car payment
$550 – utility bills
$220 – gas and car insurance
$300 – groceries
$150 – credit card payments.
Another one of my clients, a woman named Cheryl, was approved for MHA, and she saw her house payment reduced from $1,800 to $1050, a huge savings. But Cheryl, who’d taken a $20,000 pay cut, had three kids to support on her own, and she was saddled with other debt payments–a $425 car payment, a $110 student loan payment, and $200 in monthly credit card payments. Plus, her utility bills totaled about $600 per month. Her reduced net income was about $2,800 per month. These basic expenses total $2,385, leaving only $415 each month to pay for everything else–food, transportation, clothes–that her family would need. There is no way Cheryl will keep up, even with that lowered payment. She will surely go into default again.
Even though her bank followed the government’s program to the letter, it will not keep Cheryl from losing her home. It’s just a matter of time.
I can’t count how many people I speak to who are approved for Making Home Affordable, and they are in even worse financial shape than Cheryl. Sometimes I’ll put together a budget with the client, and find that their expenses total up to several hundred dollars more than their income. And that’s after the loan is modified and the payment reduced. The bank’s underwriters who make the determination whom to approve have access to their applicant’s budget information. They know there’s no way the borrower will be able to keep up. So why do they approve them? I can only assume it’s because they get to keep the incentive money given them by the government for doing the modification. And of course, when the borrower defaults–which they surely will–they get to foreclose and take possession of the house anyway.
And the government wonders why their MHA program is not stopping the foreclosure crisis.
If you’ve had any experience with the Making Home Affordable program, please feel free to post your story here.