The Obama Mortgage Modification Program: A Dismal Failure

By Nadine Cohen

In March 2009, the Obama administration unveiled a new initiative touted as a way to stop mortgage foreclosures.  The Home Affordable Modification Program (“HAMP”) was supposed to help 3 to 4 million homeowners avoid foreclosure.  The plan was simple – lenders and servicers (the companies that collect the mortgage payments for the owners of the mortgages) were going to get government money for reducing homeowners’ mortgage payments to make them affordable.  Servicers were supposed to lower homeowners’ payments down to 31% of household income by reducing interest rates for five years and adding arrears to the end of the loans.  Not great, but it was hoped that it would provide some relief for struggling homeowners, particularly those with adjustable mortgages whose payments were increasing.   Well, to date only 31,000 out of 728,000 trial modifications have been made permanent.  In fact, in the Boston, Cambridge, Quincy metropolitan area, just 1.6% of loans have been modified under the HAMP program. Yet for the 9th straight month, more than 300,000 properties in the U.S. have entered foreclosure, according to Realty Trac; and there have been 3,826 new foreclosures begun in Massachusetts in the past 60 days, as reported by Foreslosures  Almost 26,000 Massachusetts homeowners went into foreclosure during the first 11 months of 2009, up 28% from the same period in 2008, according to data from the Warren Group.

Despite the enormous need for relief, homeowners are getting very little help from the HAMP loan modification program.  Borrowers who have made all required payments under their trial modifications are being rejected for permanent modifications – often with no information as to why.  An elderly couple in Pembroke, who both lost their jobs after paying their mortgage faithfully for 14 years, was told they were not going to get a permanent modification because they made their trial payments too early!  A disabled Somerville woman who was scammed into a high cost, adjustable rate mortgage, was told after making all of her trial modification payments, that her income was not sufficient to support the modified payments, despite the fact that she submitted detailed documentation of her income prior to getting the trial modification.  Under what rational theory does a bank decide that someone can’t afford $1,600 a month, and yet require them to pay $2,400 a month?

Other borrowers have actually had their homes foreclosed on after making all their trial modification payments and while waiting for a decision on a permanent loan modification.  There have been several lawsuits challenging denials of HAMP modifications, but a California judge recently ruled that qualified borrowers under the HAMP program are only “incidental beneficiaries” and have no enforceable rights under the modification agreements.  Exactly who, then, is supposed to benefit by a loan modification?

So what went wrong with the Obama administration’s well-intentioned plan?  For one, it is totally voluntary.  It was hoped that by paying servicers for each loan modification they made, they would be induced into participating. But servicers make more money on non-performing loans, and the few thousand dollars they get for each loan modification is not a big incentive.  Once again Wall Street wins out over Main Street.

There needs to be a meaningful federal program to help homeowners who were lured into mortgages they could never afford, those who lost their jobs and need some temporary help to pay their mortgage, and those whose mortgages are way more than their properties are worth.  If we can give trillions of taxpayer dollars to help the financial institutions that created this economic mess, why can’t we figure out a way to help homeowners keep their homes?  The foreclosure crisis is a large part of our economic meltdown, yet we have not focused on stopping foreclosures.  Banks should be required to write down loan principal to the actual value of the home, and modify loans in a timely fashion to stop foreclosures that continue to weaken our economy. In addition, the bankruptcy laws need to be changed to allow homeowners the ability to modify their loans.  It’s unconscionable that businesses are allowed to restructure all sorts of debts by filing bankruptcy, yet the American homeowner is not afforded the same right to restructure their home mortgage to stay in their home.  Hard working, struggling homeowners deserve at least the same consideration given to the banks when they were in crisis.

We need to be outraged at the lack of help for homeowners facing foreclosure.  In Massachusetts, we need to support foreclosure legislation that would allow tenants and former homeowners to stay in their foreclosed homes until the property is sold to someone who will actually be living in the home; legislation to create a judicial foreclosure process; mandatory mediation before foreclosures are permitted; and a temporary moratorium on foreclosures.

Nadine Cohen, a Guild member, is the Managing Attorney of the Consumer Rights Unit of GBLS and represents low-income homeowners facing foreclosure.

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