Last summer, as President Obama’s premier plan to save millions of Americans from foreclosure foundered, the administration tossed a new life preserver to homeowners.
Officials unveiled a $1 billion program to offer loans to help the jobless pay their mortgages until they could find work again. It was supposed to take effect before the end of the year, but as of today, the program has yet to accept any applications.
“We wait and wait, and they keep saying it’s coming,” said James Tyson, 50, a Philadelphia homeowner who lost his job a year ago.
That could be an epitaph for the administration’s broader foreclosure prevention effort, as tens of billions of dollars remain unspent and hundreds of thousands of homeowners have been rejected. Now the existence of the main program, the Home Assistance Modification Program, is in doubt.
Saying it is a waste of money, the Republican-controlled House voted on Tuesday night to kill the foreclosure relief program. The Senate, which the Democrats control, will pursue a rescue. But Democrats, too, consider the program badly flawed.
The effort has failed to stanch a wave of foreclosures and a decline in home prices, which have fallen for six consecutive months and are now just barely above their recession low, according to a key index updated on Tuesday. All of this threatens the fragile economy, which is also being buffeted by foreign crises.
“The banking industry fought us tooth and nail, and we ended up with a program that is failing homeowners,” said Representative Zoe Lofgren, a Democrat from California. “The administration doesn’t give us real enforcement or answers; we just get the old yokey-doke.”
Yet the need remains great. There were 225,000 foreclosure filings in February, according to RealtyTrac. About 145,000 homeowners are in trial modifications under the Obama program. An examination of federal documents and lawsuits, and interviews with legislators, state attorneys general, housing counselors, homeowners and regulators, reveal a federal mortgage modification program crippled by weak oversight, conflicts of interest, mind-numbing complexity and poor performance by many participating banks.
- Congress set aside $50 billion for foreclosure prevention, amid administration projections that three million to four million homeowners would benefit from modifications. So far, the Treasury Department, which oversees the program, has spent slightly more than $1 billion, and just 607,000 homeowners have received permanent loan modifications (of those, 11 percent have defaulted).
- The companies that service mortgages, typically large banks, continually lose homeowner paperwork and incorrectly tell homeowners that they must be delinquent to qualify.
- Treasury officials have not fined any servicers, and the government-controlled company hired by the Treasury to oversee the program has expressed reluctance to crack down on banks.
Interviews with a dozen homeowner applicants in four states reveal a familiar pattern: Banks deny many who, by income and credit scores, appear to qualify. And homeowners end up weighed down by legal fees and facing foreclosure.
“I call constantly, they lose all my paperwork, and the same guy never gets on the phone,” said Ada Caceres, 53, who owns a modest home in Staten Island.
Ms. Caceres has struggled to make mortgage payments since her hours as a bartender were cut. She applied for relief, and her bank, JPMorgan Chase, twice granted temporary modifications. She made every payment.
Last August, Chase promised a permanent modification. Then it rescinded the offer, documents show.
“I love my house,” said Ms. Caceres, who is still negotiating. “It’s a good neighborhood. But oh my God, you want to just give up.”
Homeowners can appeal denials, but the odds are not in their favor, says the program’s inspector general. A first step is a hot line providing counseling, from an agency created by mortgage servicers.
Treasury officials argue that the mortgage program has kept more than half a million American homeowners out of foreclosure and has pressured banks to offer in-house modifications. These private modifications, however, typically offer terms significantly less favorable to homeowners than what the government program offers.
Michael S. Barr, who was a top Treasury official involved with the program, says the Obama administration sought to help homeowners and encourage banks even as it protected taxpayers.
'Order Out of the Chaos'
“We tried to bring some order out of the chaos,” said Mr. Barr, now a University of Michigan law professor. “Taxpayer money was only used for successful modifications. I think that was directionally the right thing to do.”
In the winter of 2009, the Obama administration’s urgency to address foreclosures was palpable. Hundreds of thousands of families had lost homes, and in towns from Florida to California to Nevada, foreclosure slums took root, marked by boarded-up homes and uncut grass.
Treasury officials invited Neil M. Barofsky, the special inspector general for the bank bailout, to discuss a rescue plan. They told him details of the plan were still weeks away. “That night, I was driving home and I heard on the radio that the president was going to announce it next Wednesday,” Mr. Barofsky recalled. “It was a ‘ready, fire, aim’ approach.”
Ready or not, President Obama announced the housing assistance program on Feb. 18, 2009. Banks and mortgage brokers could extend mortgages, or cut the amount of the loan or the interest rate. A monthly payment could not exceed 31 percent of gross income.
In return, the administration offered payments to banks and servicers.
“It will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama said. “By bringing down the foreclosure rate, it will help shore up housing prices for everyone.”
None of those hopes came to pass.
In fairness, Mr. Obama confronted a daunting challenge: a foreclosure crisis without precedent since the Great Depression. The Bush administration already had tried several weak foreclosure relief programs.
In October 2008, as financial calamity loomed, President Bush signed the $700 billion bank bailout known as the Troubled Asset Relief Program, or TARP. At the insistence of Congressional Democrats, he agreed to plow billions of dollars into foreclosure prevention.
When the newly elected Obama administration drew up program guidelines, officials concluded they could neither force servicers to participate nor fine them for poor performance.
This, critics say, was a mistake.
“The banks were so despised, and TARP was so front and center, you could have actually done something,” said Katherine M. Porter, a visiting law professor at Harvard. “In the midst of real boldness in bailing out the banks, we get this timid, soft, voluntary conditional program.”
Treasury officials say this is an unfair accounting. In those harried days in early 2009, no one knew how much stress near-insolvent banks could withstand. And officials tried to fine-tune the mortgage program, adding elements and redirecting unused billions of dollars into the most distressed regions.
Each new version, however, added layers of complication.
Administration officials also cite unrealistic expectations, saying they underestimated the complexity of modifying millions of troubled loans. “I wish the three to four million had never been uttered,” said Peter Swire, a former special assistant to Mr. Obama for economic policy.
Critics wave off such arguments. The Obama administration, they say, could have flexed its muscles.
The president could publicly challenge bank officials. Treasury officials could withhold payments. The administration could buy troubled mortgages at a discount and modify loans on its own.
“We needed to go out and fine the five worst offenders,” said a former administration official familiar with internal discussions, who was not allowed to talk publicly given his current position. “In hindsight, I’m almost certain we would have been well served by taking the risk and being challenged in court.”
To listen to a handful of Bank of America employees speak candidly about the mortgage program is to hear deep frustration with their bank’s performance. Their accounts, offered on the condition of anonymity as they are not allowed to talk to the press, dovetail with lawsuits filed by state attorneys general in Nevada and Arizona. (A coalition of state attorneys general is pushing an expanded foreclosure rescue plan that would impose fines on recalcitrant banks.)
Bank of America, these employees say, routinely loses documents. One department does not talk to another. Applications drag on for more than a year. Sometimes the bank forecloses while homeowners are paying modified loans. And homeowners who are denied face an imposing bundle of late fees and back-payments.
Confusion and Conflicts of Interest
A bank employee says she often advises homeowners not to apply, given the slim chances for success.
“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?”