by Catherine Reagor The Arizona Republic May. 16, 2010 12:00 AM
The federal government's 15-month-old home-loan modification program has not been the foreclosure rescue plan many Phoenix-area homeowners expected.
Slow lender response, piles of paperwork and drawn-out trial periods have frustrated many struggling homeowners.
Tens of thousands are still trying to have their mortgage payment lowered through the government's Home Affordable Modification Program, or HAMP. Meanwhile, foreclosures in Phoenix hit an all-time high in March.
Delays plague the program. Homeowners who applied for loan modifications last summer are still waiting.
Other homeowners landed temporary loan modifications and make reduced trial payments as they wait for lenders to finalize the deals. Trial payments are intended to see if the homeowner can afford the reduced rate.
Cries about banks dragging their feet arose almost as soon as the program went into effect in 2009, and the complaints haven't let up since.
Homeowners facing foreclosure are furious over the glacial pace of the program. Some give up and walk away from their mortgages. Others hang on only to have their requests denied after months of trial payments. As of March 31, 10,533 loan modifications had been granted in metropolitan Phoenix. Since the federal program began, more than 60,000 homes in the region have been foreclosed on.
The U.S. Treasury Department is in charge of the program and has heard the anger and seen the low numbers of modifications. The agency has pressured lenders to offer and complete more modifications. The number of home modifications has increased.
But still fewer than 10 percent of U.S. homeowners eligible for a government-backed loan modification have received one. Local housing advocates say the number of loan modifications granted in metro Phoenix is also less than 10 percent of those eligible, though no figures on eligible homeowners here have been released by the federal government.
A new round of federal funding is going to Arizona and four other states hardest hit by falling home prices. Most of Arizona's share will go toward loan modifications. The money could be available in July.
Longtime Arizona banker Bill Randall has been working with a Phoenix woman trying to obtain a loan modification for the past eight months.
"A loan modification for the typical homeowner is excruciatingly difficult," said Bill Randall, former president of First Interstate Bancorp., one of the nation's biggest lenders before it merged with Bank of America. "Lenders are deferring, buffering and deflecting as people diligently make payments on their temporary loan modifications month after month and can't get their phone calls returned or a permanent offer to end their fear of foreclosure."
Randall, who is now retired, said his friend's request for a loan modification was approved as a temporary modification. She has been making reduced trial payments for eight months. But now, no one at her lender seems to be able to find her paperwork or answer questions about why her loan modification hasn't been made permanent.
When the federal loan-modification program was announced in February 2009, many people were given hope of holding onto their homes.
Most lenders started taking applications last May. They were deluged with applications and weren't able to keep up.
The goal for the program was to help 4 million homeowners in four years. About 300,000 U.S. homeowners have received permanent loan modifications so far. There are no figures on how many loan modification applications are pending.
But there are plenty of horror stories.
Joe Alexander applied for a loan modification on his Phoenix home last August. "In October, my lender requested I update my paperwork, which I did," he said. "Shortly after that I was told my loan was with an underwriter and I would hear back soon."
Alexander receives a notice about every two weeks that his application is still under review. In April, he received a letter from his lender saying more documentation might be required. The letter also asked him to keep making his trial payments on time.
"That sentence really gets me," he said, because his lender never offered him reduced trial payments.
Thomas and Arlene Burkman requested a mortgage modification on their Sun City West home more than a year ago. Thomas said the lender told them to stop making payments and promised an answer in four months. The couple still haven't received an answer. They resumed making their payments, but now their credit record shows the couple is four-months delinquent on their mortgage.
Abby Menino lost her job at a Chandler technology firm in December 2008. She works temp jobs as she searches for a new permanent position. Menino applied for a loan modification last year. In June, she said her lender approved a temporary modification and told her she must make reduced trial payments for three months.
She just mailed her 10th trial payment. "If my final modification documents don't come in the mail this month," Menino said, "I don't know if I will pay in June. I feel like my lender isn't going to come through."
Lenders began offering temporary loan modifications last summer as a way to quickly help homeowners facing imminent foreclosure. The temporary modifications were originally approved by the government to run three months.
By September, temporary modifications and the reduced trial payments became a fixture of the program with many lenders.
As of March 31, almost 31,000 metro Phoenix homeowners were in temporary loan modifications, according to the Treasury Department, compared with those nearly 11,000 homeowners who received permanent modifications.
Most homeowners given temporary loan modifications sign legal documents agreeing to the trial payment, terms and requirements of the loan. Some people mistakenly think this paperwork represents a permanent loan modification, which can lead to misunderstanding and frustration if the trial period ends in foreclosure.
Temporary modifications ending in foreclosure, mortgage experts say, usually occur when the lender looks more closely at the loan and decides it can't be modified to the government's guidelines and still be a money-making decision.
So the homeowner is denied the permanent modification.
Critics allege that in some cases banks plan to foreclose on the homes but are just stringing owners along for extra payments until the lenders get around to taking the homes.
Program guidelines require that loan modifications drop to monthly payments of no more than 31 percent of a borrower's income. Lenders receive federal incentives of $1,000 and more for modifying loans. Lenders can cut interest rates, extend the term of the loans and reduce the principal amount owed to bring the payment down. So far, only the first two of those options have been adopted by most lenders for loan modifications.
In March, federal regulators held a meeting on mortgage fraud in Phoenix. Attending was U.S. Attorney General Eric Holder, Arizona regulators, lenders and real-estate industry experts. At the end there was time for only one question from the audience.
A woman asked why many lenders were misleading homeowners by giving them temporary loan modifications when those lenders have no intention of making them permanent.
Phoenix real-estate data analyst Tom Ruff, who was in the audience, said there was a lot of discussion among the panel and audience about the question but no one answered it directly. "It's a good question a lot of us are wondering about."
Housing advocates are concerned some lenders are taking advantage of people with trial payments because they give those homeowners false hope and keep them paying for a house that they will still lose to foreclose.
Since last fall, several metropolitan Phoenix homeowners have seen their homes sold at foreclosure auctions while they were making payments on their temporary loan modifications, according to public records and Phoenix real-estate attorneys.
"I cannot figure out lenders' motivation with loan modifications," said Randall, the retired banking executive. "They are being paid by the federal government for these deals, and they are handling them like debt collectors looking for the best liquidation method."
The federal government is not giving up on the program. Those five states hardest hit by foreclosure will receive $1.5 billion. States are supposed to use the money to create local programs to fill gaps in the federal plan.
Of the $125.1 million Arizona will receive, $92 million is slated to go to loan modifications. The state's plan calls for using the money to pay down borrowers' principal by as much as $50,000 if lenders will match that amount. The Arizona program could help as many as 2,000 homeowners who haven't been able to work out a loan modification with their lender.
"The federal government is giving us this money because they know the current program isn't working for everyone," Arizona Housing Department Director Mike Trailor said. "We have been talking to the lenders. Loan modifications can't work without their cooperation."
The state Housing Department submitted a plan for using the money to the Treasury Department at the end of April. The money could be available in July.
Homeowners working on loan modifications are eligible. People will be able to apply for the new federal foreclosure help as early as next month at www.savemyhomeaz.gov.
Phoenix home-loan modification delayed for many
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