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The Foreclosure Rescue Mirage

How the government’s flagship homeowner relief program hangs borrowers out to dry.

| Wed Aug. 26, 2009 6:59 AM EDT

Fausto Ordoñez tells his story for what must be the 10th or the 15th time, but the edge in his voice is as fresh as if this were the first. It began near the end of 2007, as the Great Housing Crisis swept across the country and all but wiped out Ordoñez's real estate business in the Dallas-Fort Worth area. Unable to keep up with his mortgage payments, Ordoñez turned to his mortgage company, Texas-based Saxon Mortgage Services, looking for options to help him save his home. Yet more than a year later, as the crisis deepened and the federal government rolled out its multibillion-dollar homeowner relief initiative, Ordoñez’s fate was as unclear as ever—and his drawn-out negotiations with Saxon had turned into a nightmare.

By the time the Treasury Department unveiled the centerpiece of its foreclosure prevention efforts, the $75 billion Home Affordable Modification Program, or HAMP, in March 2009, Ordoñez had endured countless setbacks. Saxon had first told him to stop making mortgage payments in order to qualify for a modification, then attempted to foreclose on his home when he followed the company's instructions—the first of several foreclosure attempts by the company. As Ordoñez grew ever more desperate, he filled out the same paperwork on multiple occassions only to be told the company had lost it. Then, for an eight-month stretch, Saxon ceased contact with him altogether, no longer even sending him monthly bills. "It was one screwup of theirs after another," he says.

When HAMP was announced, it offered Ordoñez a glimmer of hope. But Saxon wouldn't modify his mortgage under the Obama administration's much touted program. So he took matters into his own hands, filing complaints with the offices of Sen. John Cornyn (R-Tex.) and the Texas attorney general and contacting CBS News with his story. That outside advocacy, Ordoñez insists, is the only thing that saved him: In late June, he finally got his government modification. By then he estimates he'd called Saxon more than a hundred times, lost more than $4,000 on deposits for moving companies and rental housing when it looked as if he’d lose his home, and saw his credit damaged after multiple foreclosure attempts.

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Believe it or not, Ordoñez is one of the lucky ones. It wasn't easy, but he was able to take part in the government's program and keep his home. Thousands of struggling homeowners have been less fortunate, which raises serious questions about the efficacy of the administration's foreclosure rescue strategy. Interviews with homeowners, consumer advocates, attorneys, government officials, and lending experts all suggest that HAMP, now almost six months old, has struggled mightily to live up to its hype. Hundreds of pages of congressional testimony likewise detail the program’s flaws and shortcomings. And the numerous lawsuits filed against mortgage servicers participating in HAMP alleging shoddy lending practices suggest the companies the Treasury is relying on to execute HAMP may be ill suited to rescue struggling homeowners. Just the same, they are poised to receive millions—even billions—in taxpayer money for participating in the program.

Industry experts are now questioning how many of the program’s estimated 235,000 modifications will actually benefit homeowners in the long term, and say that homeowners clamoring to participate in HAMP have created an industrywide logjam for mortgage servicers, resulting in substantial delays and backed-up customer service support. The Treasury’s first servicer performance report (PDF), covering March to July 2009, found that servicers had offered modifications to just 15 percent of eligible delinquent homeowners, and initiated them for just 9 percent of that group. (And that total doesn't include homeowners who are less than 60 days delinquent or those with delinquency right around the corner, facing what's called "imminent default"—which means the percentage of HAMP modifications to date is surely even lower than 9 percent.)

Meanwhile, the fallout from the housing market’s stunning collapse continues to worsen. More than 360,000 foreclosures took place in July, a 7 percent increase from June and a 32 percent jump from a year ago, according to RealtyTrac. According to the Mortgage Bankers Association, 13 percent of mortgage loans were delinquent in the second quarter of 2009, the highest since the trade group began tracking the data in 1972. Lawmakers in Washington, including Sen. Dick Durbin (D-Ill.) and Rep. Barney Frank (D-Mass.), chairman of the powerful House financial services committee, have begun to voice doubts over whether HAMP servicers are doing enough to help homeowners. Now Frank and Durbin are revisiting the idea of allowing bankruptcy court judges to modify mortgage terms, an option called “cramdown” that the Senate rejected earlier this year. Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania who runs The Mortgage Professor website, is unflinching in his assessment of HAMP: “At this point, I would have to say it’s a failure.”

HAMP’s problems began before the program had a name. Racing to provide relief to ailing homeowners as foreclosures mounted, President Obama traveled in late February to Mesa, Arizona, the city with the fifth-highest foreclosure rate nationwide in 2008, to announce the government’s rescue plan. While short on details, this program, he told a packed crowd at Mesa’s Dobson High School, could help as many as 3 to 4 million homeowners. “By making these investments in foreclosure prevention today, we will save ourselves the costs of foreclosure tomorrow—costs that are borne not just by families with troubled loans,” he explained, “but by their neighbors and communities and by our economy as a whole.”

Initial guidelines (PDF) for HAMP didn't emerge for several more weeks. But that didn’t stop struggling homeowners from flooding their mortgage companies, which largely lacked the capacity to handle the deluge. "Think of the mounds of paper coming in on a daily basis," says Joseph Smith II, president and CEO of Kentucky-based Default Mitigation Management, a private loan workout and negotiation company. "The rollout and everything else, it should never have been announced until the policies and procedures were in place."

In theory, HAMP works like this: Eligible borrowers, including homeowners behind on their payments or with a serious chance of default, apply for a program modification through their mortgage servicers—the companies that handle day-to-day responsibilities like taking payments, providing customer service, and foreclosing on those in default, but often don’t own the mortgage itself. If accepted, the homeowner’s monthly payments are lowered under HAMP terms, which say the new payments should not be more than 31 percent of the homeowner’s income. Servicers can lower payments by decreasing the interest rate, extending the term of the mortgage, or even forgiving part of the principal—the total amount owed. HAMP calls for a 90-day trial period for the new modification, and if the homeowner pays those three trial payments on time, the modification is finalized and extended over several years. For each successful HAMP modification, servicers receive a $1,000 incentive payment, and can earn $1,000 more each year (for up to three years) that borrowers stay in the program.

The problem is that the Obama administration gave mortgage servicers little more than a heads-up before rolling out its program, leaving companies to play catch-up once HAMP was announced. A vice president at Wells Fargo Home Mortgage, Mary Coffin, told the Senate banking committee in July that the percentage of loan workout inquiries from borrowers who are current increased from, on average, 5 to 10 percent a month to 40 percent since HAMP was implemented. Further complicating matters, the Treasury has continued to tweak the new program’s details while giving servicers little advance notice. “The current method of publicly announcing new guidelines or changes concurrently with their effective dates creates immediate demand with insufficient lead time for operational readiness,” Allen Jones, an executive for default management policy at Bank of America, testified to Congress in mid-July. “This can lead to negative customer experience and, ultimately, backlash against the programs.”

"Negative customer experience" is putting it mildly. One Connecticut woman described her ongoing struggle to modify her mortgage as her "worst nightmare." Simply getting someone on the phone who can help or who has any authority, homeowners say, can be a maddening endeavor. "I would call all the time, all the time," says Tangi Smith, a single mom living in Lake Worth, Florida, who's been trying to get a HAMP modification with CitiMortgage. "You just get this big circle jerk."

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