U.S. loan program may have made things worse

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U.S. loan program may have made things worse

Experts: $75 billion effort to fight foreclosures has hurt some homeowners

By S. Goodman

updated 11:41 p.m. ET, Fri., Jan. 1, 2010

The Obama administration's $75 billion program to protect homeowners from

foreclosure has been widely pronounced a disappointment, and some economists and

real estate experts now contend it has done more harm than good.

Since President Obama announced the program in February, it has lowered mortgage

payments on a trial basis for hundreds of thousands of people but has largely

failed to provide permanent relief. Critics increasingly argue that the program,

Making Home Affordable, has raised false hopes among people who simply cannot

afford their homes.

As a result, desperate homeowners have sent payments to banks in often-futile

efforts to keep their homes, which some see as wasting dollars they could have

saved in preparation for moving to cheaper rental residences. Some borrowers

have seen their credit tarnished while falsely assuming that loan modifications

involved no negative reports to credit agencies.

Some experts argue the program has impeded economic recovery by delaying a

wrenching yet cleansing process through which borrowers give up unaffordable

homes and banks fully reckon with their disastrous bets on real estate, enabling

money to flow more freely through the financial system.

Postponing the pain?

" The choice we appear to be making is trying to modify our way out of this,

which has the effect of lengthening the crisis, " said Katari, managing

member of Watershed Asset Management, a San Francisco-based hedge fund. " We have

simply slowed the foreclosure pipeline, with people staying in houses they are

ultimately not going to be able to afford anyway. "

Mr. Katari contends that banks have been using temporary loan modifications

under the Obama plan as justification to avoid an honest accounting of the

mortgage losses still on their books. Only after banks are forced to acknowledge

losses and the real estate market absorbs a now pent-up surge of foreclosed

properties will housing prices drop to levels at which enough Americans can

afford to buy, he argues.

" Then the carpenters can go back to work, " Mr. Katari said. " The roofers can go

back to work, and we start building housing again. If this drips out over the

next few years, that whole sector of the economy isn't going to recover. "

The Treasury Department publicly maintains that its program is on track. " The

program is meeting its intended goal of providing immediate relief to homeowners

across the country, " a department spokeswoman, Meg Reilly, wrote in an e-mail

message.

But behind the scenes, Treasury officials appear to have concluded that growing

numbers of delinquent borrowers simply lack enough income to afford their homes

and must be eased out.

In late November, with scant public disclosure, the Treasury Department started

the Foreclosure Alternatives Program, through which it will encourage

arrangements that result in distressed borrowers surrendering their homes. The

program will pay incentives to mortgage companies that allow homeowners to sell

properties for less than they owe on their mortgages — short sales, in real

estate parlance. The government will also pay incentives to mortgage companies

that allow delinquent borrowers to hand over their deeds in lieu of foreclosing.

Ms. Reilly, the Treasury spokeswoman, said the foreclosure alternatives program

did not represent a new policy. " We have said from the start that modifications

will not be the solution for all homeowners and will not solve the housing

crisis alone, " Ms. Reilly said by e-mail. " This has always been a multi-pronged

effort. "

Under the current program, the government provides cash incentives to mortgage

companies that lower monthly payments for borrowers facing hardships. The

Treasury Department set a goal of three to four million permanent loan

modifications by 2012.

" That's overly optimistic at this stage, " said H. Neiman, the

superintendent of banks for New York State and an appointee to the Congressional

Oversight Panel, a body created to keep tabs on taxpayer bailout funds. " There's

a great deal of frustration and disappointment. "

As of mid-December, some 759,000 homeowners had received loan modifications on a

trial basis typically lasting three to five months. But only about 31,000 had

received permanent modifications — a step that requires borrowers to make timely

trial payments and submit paperwork verifying their financial situation.

The government has pressured mortgage companies to move faster. Still, it argues

that trial modifications are themselves a considerable help.

" Almost three-quarters of a million Americans now are benefiting from

modification programs that reduce their monthly payments dramatically, on

average $550 a month, " Treasury Secretary F. Geithner said last month at

a hearing before the Congressional Oversight Panel. " That is a meaningful amount

of support. "

But mortgage experts and lawyers who represent borrowers facing foreclosure

argue that recipients of trial loan modifications often wind up worse off.

In Lakeland, Fla., Jaimie S. , 29, called her mortgage company, then

Washington Mutual, in October 2008, when she realized she would get a smaller

bonus from her employer, a furniture company, threatening her ability to

continue the $1,250 monthly mortgage payments on her three-bedroom house.

In April, Chase, which had taken over Washington Mutual, lowered her payment to

$1,033.62 in a trial that was supposed to last three months.

Ms. made all three payments on time and submitted required documents,

Chase confirms. She called the bank almost weekly to inquire about a permanent

loan modification. Each time, she says, Chase told her to continue making trial

payments and await word on a permanent modification.

`I bawled my eyes out'

Then, in October, a startling legal notice arrived in the mail: Chase had

foreclosed on her house and sold it at auction for $100. (The purchaser? Chase.)

" I cried, " she said. " I was hysterical. I bawled my eyes out. "

Later that week came another letter from Chase: " Congratulations on qualifying

for a Making Home Affordable loan modification! "

When Ms. frantically called the bank to try to overturn the sale, she was

told that the house was no longer hers. Chase would not tell her how long she

could remain there, she says. She feared the sheriff would show up at her door

with eviction papers, or that she would return home to find her belongings piled

on the curb. So Ms. anxiously set about looking for a new place to live.

She had been planning to continue an online graduate school program in supply

chain management, and she had about $4,000 in borrowed funds to pay tuition. She

scrapped her studies and used the money to pay the security deposit and first

month's rent on an apartment.

Later, she hired a lawyer, who is seeking compensation from Chase. A judge later

vacated the sale. Chase is still offering to make her loan modification

permanent, but Ms. has already moved out and is conflicted about what to

do.

" I could have just walked away, " said Ms. . " If they had said, `We can't

work with you,' I'd have said: `What are my options? Short sale?' None of this

would have happened. God knows, I never would have wanted to go through this.

I'd still be in grad school. I would not have paid all that money to them. I

could have saved that money. "

A Chase spokeswoman, Holevas, confirmed that the bank mistakenly

foreclosed on Ms. 's house and sold it at the same time it was extending

the loan modification offer.

" There was a systems glitch, " Ms. Holevas said. " We are sorry that an error

happened. We're trying very hard to do what we can to keep folks in their homes.

We are dealing with many, many individuals. "

Many borrowers complain they were told by mortgage companies their credit would

not be damaged by accepting a loan modification, only to discover otherwise.

In a telephone conference with reporters, Jack Schakett, Bank of America's

credit loss mitigation executive, confirmed that even borrowers who were current

before agreeing to loan modifications and who then made timely payments were

reported to credit rating agencies as making only partial payments.

The biggest source of concern remains the growing numbers of underwater

borrowers — now about one-third of all American homeowners with mortgages,

according to Economy.com. The Obama administration clearly grasped the threat as

it created its program, yet opted not to focus on writing down loan balances.

" This is a conscious choice we made, not to start with principal reduction, " Mr.

Geithner told the Congressional Oversight Panel. " We thought it would be

dramatically more expensive for the American taxpayer, harder to justify, create

much greater risk of unfairness. "

Mr. Geithner's explanation did not satisfy the panel's chairwoman,

Warren.

" Are we creating a program in which we're talking about potentially spending $75

billion to try to modify people into mortgages that will reduce the number of

foreclosures in the short term, but just kick the can down the road? " she asked,

raising the prospect " that we'll be looking at an economy with elevated mortgage

foreclosures not just for a year or two, but for many years. How do you deal

with that problem, Mr. Secretary? "

A good question, Mr. Geithner conceded.

" What to do about it, " he said. " That's a hard thing. "

This article, " U.S. Loan Effort Is Seen as Adding to Housing Woes, " first

appeared in The New York Times.