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Government Mortgage Modification Programs Still Not Working

by Paul Kiel ProPublica, Today, 11:33 a.m.

Each month, the Treasury Department releases new information about how homeowners in its mortgage modification program are faring. And each month, the numbers get bleaker.

Take a look at our graphical rundown of the numbers, broken down by each bank or mortgage servicer participating in the program.

Have you worked for a servicer in a loan modification call center?

Are you a homeowner who’s struggling to pay your mortgage? Are you seeking a loan modification through the government program?

Here’s a quick summary: About 1.3 million homeowners have received a trial modification, a temporary reduction in payments designed to make sure they can keep up with the lower monthly bill. It is supposed to last three or four months. For most, it has lasted longer than that, and for over a quarter of a million homeowners, it has lasted longer than six months.

About a million homeowners have received a final answer from their mortgage servicers. For nearly 60 percent of them, the answer was that they did not qualify for the program, even though most did not miss a trial payment. For those who remained current, the most common reasons for disqualifications were homeowners’ not meeting the program’s income requirements or not sending in the required documents, according to the Treasury. (Meanwhile, homeowners routinely complain that their documents are lost when they send them in to the servicer.)

Despite all those denials, there’s still a large backlog of homeowners in limbo: About 118,000 have  been in a trial for more than six months. Back in May, Treasury officials said mortgage servicers had promised them this backlog would be cleared by the end of June. That didn’t happen. On Friday, Herb Allison, the Treasury official in charge of the TARP, said servicers had made a new promise: They will reach decisions on those loans “over the next month or so.”

This lack of accountability has been a recurring feature of the program. Several times, Treasury has threatened to penalize servicers for breaking the program’s rules, but has never followed through. Recently, nearly 400 homeowners responded to a ProPublica questionnaire, and most said their servicers had broken the program’s rules. Our profiles of five homeowners who’ve tried to get a modification through the program also show the errors and delays that have been common.

Allison put a positive spin on the fact that hundreds of thousands of homeowners have waited for several months for a final answer from their servicers. Homeowners in the trials have “benefited from lower payments … for many months” and from “having time to obtain other solutions to their needs,” he said. And that relief has come “at no cost to taxpayers.” (Servicers in the program are paid incentives only for completed, permanent modifications, which accounts for the fact that very little of the $75 billion once earmarked for the program has actually been spent.)

Homeowners in the prolonged trials tend not to see the situation so blithely. Most will be ultimately denied a modification under the program, and some of those homeowners will be confronted by demands from their servicers that they immediately pay up their arrears or face foreclosure. In addition, homeowners in the trials have often seen their credit scores decline as a result of the trial.

Advocates also say that it would have been better for denied homeowners to have saved money for the possibility of foreclosure rather than have spent it on prolonged trial payments. As Diane Thompson, an attorney with the National Consumer Law Center, put it: “Being in a trial modification if you don’t get a permanent modification is worse than having not been in a trial modification. Period.”

Treasury Department officials have emphasized that nearly half of denied homeowners will nevertheless be offered modifications by their servicers. But those modifications are not required to meet the guidelines of the federal program and are thus not likely to reduce monthly payments as steeply. A report released by federal regulators earlier this year showed that 78 percent of modifications through the program reduced the homeowner’s monthly payments by over 20 percent. By comparison, only 36 percent of modifications outside the program cut payments that much.

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