Foreclosure Aid Fell Short, and Is Fading

A bank employee says she often advises homeowners not to apply, given the slim chances for success.

Treasury hired Fannie Mae and Freddie Mac, two government-controlled mortgage finance giants, to oversee the program. This decision was problematic.

“Many of these people are losing their homes,” she said. “The paperwork that sets them up is not detailed enough. It does not tell the customer the consequences of going forward with this.”

Dan B. Frahm, a Bank of America spokesman, acknowledged that the bank had made its share of mistakes, including losing too many documents. But it faced a narrow window to carry out a complex and ever-changing program, he said.

“We have completed more modification under HAMP (106,000) than any other participating servicer, and have more active modifications than other participants as well,” Mr. Frahm wrote in an e-mail, using the program’s shorthand name. “We continue to improve performance.”

For years, loan servicing departments acted as money machines for banks. They collected payments and foreclosed on the occasional delinquent homeowner.

But a foreclosure flood rolled in by 2007, and servicers all but drowned. The government’s program added to the problem. At first, Treasury allowed homeowners to apply without proof of income, figuring that quick relief might save homes. It later demanded income verification, loosing another flood, as homeowners sent in piles of documents by fax.

Federal regulators added their own confusion of overlapping authority and conflicts of interest.

Treasury hired Fannie Mae and Freddie Mac, two government-controlled mortgage finance giants, to oversee the program. This decision was problematic. As the Congressional Oversight Panel noted, these agencies “are highly conflicted because they hold the credit risk on most mortgages in the United States and have their own operational concerns.”

As if to underscore that point, Freddie Mac filed documents with the Securities and Exchange Commission noting that imposing penalties on banks could “negatively impact our relationships with these sellers/servicers, some of which are among our largest sources of mortgage loans.”

Treasury has paid the agencies a combined $212 million to administer the program.

The Treasury Department, too, was a reluctant enforcer, declining to impose fines or demand repayments. “This was structured as a voluntary program,” said Timothy Massad, acting assistant secretary. “We do not have the power to impose fines.”

Mr. Barofsky, the special inspector general, waves off protestations of powerlessness. How, he asked, could Treasury sign agreements to pay billions to banks without penalties for failure to comply?

“Treasury wasn’t willing to kick them in the only place that matters: in the pocketbook,” he said.

In private conversations, senior Treasury officials offer an often-heard critique: Homeowners failed the program. That is, Americans were in far worse shape — jobless, underwater on mortgages and with terrible credit — than anyone realized in 2009.

Daily encounters in county courthouses suggest this is overstated. Homeowners bring in foot-high piles of paper documenting income, credit reports and loan payments. Some missed a payment or two, but many are not deadbeats.

Yet they cannot obtain a modification.

In Staten Island, The New York Times examined eight cases where homeowners seemed to possess the income and credit scores to qualify for the program. Yet after months of trying, even with the help of Staten Island Legal Services, not one has obtained a permanent modification.

Any single case speaks as eloquently as another.

Eric and Annette Padilla bought their home in 2003. Then Mr. Padilla fell ill and Ms. Padilla quit her job to care for him, and the couple fell behind on their mortgage in 2009. (Their income dropped to less than $60,000, from $96,000.)

They applied for the program through their bank, HSBC, and received a three-month modification. They made the payments on time. In August 2009, they requested a permanent modification.

The Padillas called the bank every week. One representative said their file was incomplete, another asked for more documents, a third said the documents were there all along.

In September, the bank said their documents had “become stale” and told them to resubmit. Eventually, they were given a new temporary modification. Once again they made every payment on time.

In January 2010, they sought another permanent modification. Then they heard back from HSBC: denied. The reason? The couple had overpaid one month.

Last summer, HSBC filed papers to foreclose against the Padillas. For Mr. Padilla, 41, the house was his step out of the housing projects; he has no intention of surrendering.

“I ask myself sometimes, why is this happening?” he says. “Wasn’t this program set up for hard-working people like us?”