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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

Kristina Page of Panama City, Florida, can relate. She realized earlier this year that her adjustable-rate mortgage would reset in August, and knew she’d struggle with the increased payments. Her husband had recently been laid off, and during that time, Page said, "we blew through our savings and had no money for a down payment for refinancing." An avid Daily Kos blogger and fan of the popular economics blog Calculated Risk, Page had been following the Obama administration’s homeowner relief efforts—which is why it struck her as somewhat strange when her company, also Saxon Mortgage Services, called her on the day HAMP was announced and offered her a modification of its own. The company offered to freeze her interest rate at around 10 percent with no reduction in payment or owed principal amount—a far worse deal than those brokered under HAMP. When she inquired about HAMP, Page recalls, the company said, "‘We haven’t heard anything about it.' I just thought, ‘You’re trying to scam me.'"

So Page kept making regular payments on her tan-colored ranch with the pool out back, the one that used to be her parents’ dream house. It wasn’t until she called Saxon again in June that the company offered her a HAMP modification. But several weeks after mailing in the required paperwork, a Saxon rep called to say the company hadn’t received anything—even though Page had tracked the package online and even knew the name of the employee who’d signed for it. The company has yet to find the original package, and Page has since sent Saxon another set of documents. She’s also filed a complaint with the office of the Special Inspector General for the Troubled Asset Relief Program. (Neil Barofsky, the Special Inspector General for TARP, told Mother Jones his office has received numerous complaints about mortgage servicers, and SIGTARP’s most recent report [PDF] says the watchdog has begun an audit of the government’s modification program.)

At least Page got a HAMP offer. Some mortgage servicers flatly refuse homeowners' HAMP modification requests and offer no explanation why, say consumer advocates and attorneys. And if making contact with a helpful employee is hard, learning why someone was rejected for HAMP can often prove impossible. "It is not unusual for the homeowner to get no notice that HAMP is unavailable other than to learn that the house is back on the sheriff sale list," Irwin Trauss, an attorney with Philadelphia Legal Assistance, which provides free legal services on foreclosure issues, told (PDF) a House subcommittee in early July.

HAMP’s failings can largely be attributed to flaws in its design, particularly when it comes to the government's guidelines determining which homeowners are eligible, what kind of modification they should receive, and even how the modification process is supposed to work. (The Treasury Department did not respond to multiple requests for comment.)

For instance, one HAMP guideline specifies that a mortgage payment can't be more than 31 percent of an individual or couple’s gross income. But gross income can be an imperfect measurement—it leaves out expenses that lenders should account for, like alimony, child support, and back taxes. A more effective program, says Joseph Smith, would use net income, the actual amount of money someone has at the end of the month. This measure, he explains, shows "the borrower has the ability to sustain the mortgage, pay living expenses, and has a reasonable likelihood of success. Anything short of that is an absolute disaster."

Then there's HAMP’s paperwork process. Lacking a standardized set of forms for all servicers, the program's servicers require their own sets of documents, complicating the process for third-party debt counselors, who assist homeowners trying to navigate pages of perplexing mortgage documents. "It’s a terrible hassle, and borrowers have problems understanding these forms and filling them out correctly," says the University of Pennsylvania's Guttentag. "The whole process would be enormously simplified if there was one master form."

The program also gives homeowners no fair warning about the damage HAMP can inflict on their credit. Guidelines published by the Consumer Data Industry Association that apply to HAMP say homeowners who enter the program’s trial period current on their mortgages should continue to be reported to credit bureaus as current but should also be reported as paying "under a partial payment agreement." An official with FICO, a private company that calculates credit scores, told Bloomberg that the firm views mortgage renegotiation as an indicator of greater risk even if the homeowner pays on time. Victor Stern of Charlotte, North Carolina, told the news service that his credit score dropped by 121 points, from 740 to 619, when he began HAMP’s trial period. "This program is helping with payments on one side," he said, "but then hurting your credit on the other, so you wind up behind the eight ball."

On the servicer side, another crucial calculation—how much a homeowner should pay—is just as flawed. HAMP guidelines permit servicers to take financial information over the phone for admission into the program’s three-month trial period without verifying it. While this surely speeds up the application process, it can also lead to homeowners, intentionally or not, giving incomplete or false information to get in. Once the trial period is up, however, homeowners must submit official documentation—and if that doesn’t match their trial period information, they could end up in an unaffordable modification or dumped out of the program altogether, landing them back in jeopardy of foreclosure. Experts and servicers alike believe the technology exists to both improve the application process and speed it up (like an online application portal for the entire program), but the Treasury has yet to implement such a measure, even though it could prevent taxpayer dollars from being squandered on failed modifications.

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