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AP IMPACT: Gov't mortgage partners sued for abuses
WASHINGTON – Billions of dollars the government is spending to help financially pressed homeowners avert foreclosure are passing through — and enriching — companies accused of preying on the people they're supposed to help, an Associated Press investigation has found.
The companies, known as mortgage servicers, are middlemen who collect monthly payments from homeowners and funnel the money to the banks or investors who hold the loans. As the only link between borrowers and lenders, they're in the best position to rework the terms of loans under the government's $50 billion mortgage-modification program. The servicers are paid by the government if the changes keep homeowners from falling behind on payments for at least three months.
But the industry has a checkered history. The AP found that at least 30 servicers have been accused in lawsuits of harassing borrowers, imposing illegal fees and charging for unnecessary insurance policies. More recently, the companies also have been criticized for not helping homeowners quickly enough — delays that lead to more fees for homeowners and profits for servicers.
The biggest players in the servicing industry — Bank of America, Wells Fargo & Co., JPMorgan Chase & . and Citigroup Inc. — all face litigation, some of which has led to settlements with homeowners. All will receive federal money to modify loans.
But the industry's smaller players, which specialize in servicing riskier subprime loans and loans already in default, face harsher accusations that they systematically abused borrowers.
"The irony is, in essence, the government is paying servicers to do their job, which is to do loan modifications where appropriate," said Kurt Eggert, a law professor at Chapman University in Orange, Calif. "And that's not a part of their job they were ever especially good at."
The government says it has no choice but to partner with the servicers because they are the only link between borrowers and the investors who indirectly own their mortgages through securities. The companies acknowledge there have been abuses in their industry but argue many cases hinge on technicalities. They say borrowers facing foreclosure often sue out of desperation, trying to slow down the foreclosure process with frivolous allegations.
When President Barack Obama announced the plan, called the Home Affordable Modification Program, in March, he said it would help up to 4 million homeowners avoid foreclosure. But only about 200,000 loan modifications are under way. Last week, 25 mortgage-servicing executives were summoned to the Treasury Department for meetings at which they promised to deliver 300,000 more loan modifications by Nov. 1.
Under the loan-modification program, 38 servicers will earn fees to help reduce the monthly payments of homeowners facing foreclosure. The goal is to modify mortgages so homeowners' payments don't exceed 38 percent of their gross monthly income.
Without government aid, servicers don't have enough financial incentive to modify mortgages. Each year, they earn about one-quarter to one-half percent of the value of the loans they service, so the larger the mortgage, the more they make. They earn less if the loan is modified, usually by lowering the interest rate or principal or adjusting the term.
The servicers also make money through late fees, or by foreclosing. The paperwork necessary to execute a foreclosure can generate hundreds of dollars in fees for some servicers.
Under the Treasury program, the servicers could pocket more than $5,500 for each loan they modify. But they won't be paid until the homeowners have made timely payments for three months. The servicers will also get government money to give to mortgage investors to compensate them for reducing the loans. How much will depend on what it costs the investors to modify the loan.
The largest mortgage servicing abuse lawsuit was brought against Select Portfolio Servicing, which was accused of imposing illegal fees and charging borrowers for insurance they did not need.
The company paid $55 million in 2003 to settle charges brought by the Department of Housing and Urban Development and the Federal Trade Commission. It is eligible for up to $660 million under the Obama plan — some to keep and some to pass on to investors and homeowners.
Most complaints against servicers allege similar abuses. Servicers often dispose of the harshest charges by settling without admitting guilt, as Select Portfolio did in 2003.
An AP analysis of the 38 servicers the government is paying to help vulnerable homeowners found that:
• At least 30 face lawsuits from homeowners and advocates claiming they charged illegally high fees, prematurely foreclosed on homes and engaged in illegal collection practices. Most of the suits allege violations of laws that protect homeowners in foreclosure and prevent debt-collection abuse. Treasury's program requires servicers to comply with these laws.
• At least 14 have been accused of misleading customers before the program began about whether they would qualify for loan modifications or how low their new payments might be. In many such cases, servicers are accused of telling borrowers not to make payments because their applications for modifications were pending — and moving to foreclose anyway.
• At least three of the companies settled federal predatory collection allegations by pledging to correct their behavior. They have since been sued hundreds of times by homeowners who allege the same illegal practices.
"There is no question that there have been significant abuses by servicers, and a big part of that is there's no one who is carefully monitoring their work to make sure that they're not taking advantage of borrowers," Eggert said.
In the past, loan servicing was a sleepy corner of the mortgage industry. Servicers did little more than open envelopes containing mortgage payments and forward money to investors.
The business became far more profitable during the housing boom. The proliferation of mortgages sold to risky, or subprime, borrowers created an opening for the servicing business. They specialized in collecting from people less likely to make timely payments, and profited as late fees mounted.
Servicers wanted this business so much that they sometimes bid more than they could reasonably expect to make back for handling a pool of loans, said Daniel Hedges, an attorney with Mountain State Justice Inc., a nonprofit West Virginia law office that represents homeowners facing foreclosure. As a result, some servicers began adding fees that weren't due or otherwise overcharging borrowers, he said.
As borrowers fell behind on their loans, the servicers pocketed more late fees, foreclosure fees and negotiation fees. Some even profited from foreclosures.
In February 2005, Janet Simmons was more than $30,000 behind on her mortgage. Bayview Loan Servicing began foreclosure proceedings on her home, located on 3.1 acres in rural Rockingham County, Va., between Washington and Charlottesville.
But Bayview — which stands to receive up to $44.3 million from Treasury's loan-modification program — foreclosed without providing required written notice, the Virginia State Supreme Court found. Bayview never sent Simmons a letter by certified mail, as required under her loan.
Unbeknownst to Simmons, the home was sold at auction in July 2005. She didn't find out she had lost the house until the new buyer asked why she was doing yard work on a home she no longer owned, said her lawyer, Kevin Rose.
The courts awarded Simmons $156,809 — the difference between what her home was worth and what it had received in a foreclosure sale.
Simmons could not be reached for comment. A spokesman for Bayview did not return repeated phone calls requesting comment.
Rose said he gets "a lot of calls where it's clear something was done wrong (by the servicer) and it's clear you could reverse the foreclosure."
But Rose and other housing lawyers said many cases of servicer abuse go unreported and unpunished — regardless of the evidence. In many states, there are no clear laws awarding legal fees to borrowers' attorneys when servicers have acted improperly, Rose said.
"Servicers have flown under the regulatory radar," said Julia Gordon, senior policy counsel with the Center for Responsible Lending, a Durham, N.C.-based advocacy group.
For six years, Jerry Turner made payments to Select Portfolio for a Charleston, W.Va., house he no longer owned.
In 2000, Turner was promised a loan modification in a court settlement. His mortgage belonged to a bank-owned pool of loans eventually serviced by Select Portfolio. Instead of lowering Turner's payments as the court had ordered, the bank foreclosed on Turner's home, court documents show. The bank then took the house back at auction.
Select Portfolio never told Turner his house had been sold. Instead, it continued sending him monthly invoices and cashing his checks. He didn't find out he had lost the house until it was sold a second time, at auction — because Select Portfolio hadn't paid property taxes on the home.
"I had excellent credit at one time," Turner said. "Now, I can't borrow money on the house, I can't leave it, and it's been tied up so much I don't know what to do."
Turner's case against Select Portfolio is pending in West Virginia state court.
Borrowers facing foreclosure often don't know who holds their mortgage. They have few options other than to sue their servicers for mishandling collections or failing to give adequate notice before foreclosing.
Servicers sometimes face frivolous lawsuits. But many servicers in line for government money are accused of ongoing, systematic abuses.
As part of its 2003 settlement with regulators, Select Portfolio, promised to end practices including collecting illegal fees and forcing borrowers to buy insurance. But the company, now owned by the investment bank Credit Suisse Group, has since been named in dozens of lawsuits alleging similar violations. A 2008 complaint in West Virginia state court, for example, alleged that the company charged homeowners thousands of dollars in unauthorized late fees and other charges.
Select Portfolio spokesman Craig Bullock said the company doesn't comment on inquiries "about our practices and so forth."
Another servicer, Ocwen Financial Corp., was found in 2004 to be engaged in illegal, unsafe and unsound collection practices. Ocwen settled with regulators by promising to comply with laws on foreclosure and debt collection and to try to find out if homeowners had insurance before charging them for its own, costlier insurance.
Ocwen, which is in line to receive up to $553.4 million from the Treasury, faces a federal class-action complaint for harassing homeowners with excessive phone calls, charging illegal fees and adding unnecessary insurance premiums to borrowers' bills.
Ocwen engaged in "a nationwide scheme of illegal, unfair, unlawful, and deceptive business practices," the complaint contends.
Paul Koches, Ocwen's general counsel, disputed the allegations and noted the court has rejected one part of the lawsuit concerning illegal fees. "We have a deep and continuing commitment to foreclosure prevention," he wrote in an e-mail.
The charges against Select Portfolio and Ocwen are unusual in their scope and severity. But at least 28 other companies on Treasury's list also have been charged with, and in many cases settled, similar accusations.
Treasury says it has no choice but to work with all servicers, no matter how dubious their records. Refusing to work with a particularly bad player would "deprive homeowners who have mortgages with that servicer from getting modifications," Treasury spokeswoman Jenni Engebretsen said in a statement.
(click here for direct access to CNN for full report on article details below)
Obama mortgage plan needs work
Many borrowers are not getting help under president's modification or refinancing plan. Officials don't expect problems to be fixed until the fall..
NEW YORK (CNNMoney.com) -- Mr. President, help us get one of your mortgage workouts now.
That's what many borrowers are saying nearly five months after President Obama unveiled his housing rescue plan. The program is beset with problems, say borrowers, housing counselors and even the president himself.
Loan servicers are overwhelmed by the numbers of homeowners applying for loan modifications or refinancing. Borrowers are frustrated that their paperwork is being lost, and calls are not returned. Administration officials are racing to roll out new features to improve the program.
Even Obama acknowledges that the program is failing to stem the foreclosure tidal wave.
"Our mortgage program has actually helped to modify mortgages for a lot of our people, but it hasn't been keeping pace with all the foreclosures that are taking place," Obama said last month.
CNNMoney.com has heard from hundreds of troubled homeowners who've run into roadblocks. The complaints are often the same: a lack of responsiveness by servicers.
Even many of those whose applications are deemed complete say they never receive final approval or are told they can't be helped now because they haven't missed a payment.
"This crisis is a direct result of greed on both sides of the borrower/lender relationship. One side fed the other and the argument through history will always be which came first, the chicken or the egg? It's my opinion that it does not matter.
It took both to fuel the inflated expectations on both sides of this equation! We as a nation forgot the principles of hard work in succeeding and instead embraced the easier fast track principles of gambling through increased leverage and risk!"
"Let me be clear on this, it will take both sides of the borrower/lender relationship to work this out. Resolving this crisis will only occur through immediate financial concessions and considerations through settlements and modifications of existing debt or the U.S. as we know it will fall into deep financial economic decline. A decline never experienced by our nation and that includes the GREAT DEPRESSION!"
The Great Panic
August 8, 2008
How the world changed one day last summer.
Black August: On the New York Stock Exchange, waiting for the bottom to fall out, August 9, 2007.
Photograph by: Daniel Acker/Bloomberg News/Landov
It can be tricky trying to pin down the beginning or end of world events. When asked about the impact of the French Revolution nearly two centuries later, Zhou Enlai replied: "It is too soon to tell."
Still, the birth of the credit crunch—the child of a burst bubble in housing—can be traced to a Thursday last summer, a day when many Wall Street executives, bankers, and government officials were enjoying their vacations.
On August 9, 2007, it became clear that fear had paralyzed the world's credit markets. The question was no longer only about the quality of assets or the availability of cash. Everything was suspect and no one was willing to take any chances.
The world had turned subprime.
The chill in the credit markets was already apparent beginning in February in the wake of the collapse of the subprime mortgage market in the United States. Many mortgage lenders were in trouble. Two Bear Stearns hedge funds that had bet heavily on securities tied to subprime mortgages collapsed earlier in the summer. In July, the German government organized a $5 billion bailout of IKB bank.
Then, an announcement by a big French bank starkly revealed to the world that the credit markets had frozen up
Early that August morning in Paris, BNP Paribas announced that it was stopping investors from withdrawing money from three funds because it could not determine the market for their holdings.
"The complete evaporation of liquidity in certain market segments of the U.S. securitization market has made it impossible to value certain assets fairly regardless of their quality or credit rating," the bank said in a statement.
The statement ignited rumors of possible problems at other banks and at hedge funds. Stocks on European markets slid. Fear held dominion in the markets.
"This is the day the world changed," Adam Applegarth, then the chief executive of Northern Rock, said looking back, as the British lender had to be rescued from collapse by the Bank of England just days later. (To see just how much the world has changed in a year from the credit storm, click here.)
Nearly as startling on August 9 was the rapid response of the world's central bankers. The European Central Bank pumped $147 billion into euro money markets to try to unblock lending among banks. It was a bigger infusion than the one that came in response to the 9/11 attacks.
The Federal Reserve, the Bank of Canada, and the Bank of Japan followed with similar, but smaller steps.
Liquidity, however, was not the core issue. It was confidence. Banks did not trust other banks. Investors fled from risk. Trust would not be restored with below-market-rate loans from central banks.
Even after the unusual moves by the central banks, stocks in the United States slid. Spreads widened. After the market close, Countrywide Financial, the biggest American mortgage lender, warned that "unprecedented disruptions" in the credit markets threatened its financial health.
Fears mounted. Loans, for businesses and consumers, soon became more expensive and more difficult to get. Dealmaking came to a standstill. The crunch was being felt.
In response, the Fed first went by the playbook, then threw the book out. Some economists contend that Ben Bernanke and other policymakers were too slow to respond, Zubin Jelveh reports.
The credit crunch has reshaped the financial landscape. Banks, insurers, and other institutions have written down hundreds of billions of dollars in assets. Bear Stearns and Countrywide no longer exist. A year later, it is still difficult to tally up the damage on Wall Street or to forecast its future, Megan Barnett writes.
No end is in sight. The credit crunch, on top of the slide in housing prices and the surge in energy prices, has probably tipped the economy into a recession. It is squeezing consumers and businesses. Banks are still scrambling to raise capital and still marking down assets as loan delinquencies and foreclosures increase. The Treasury Department has a rescue plan for mortgage giants Fannie Mae and Freddie Mac. Sweeping overhauls of the financial regulation system have been proposed.
In a year, the worldview of finance has been turned upside down. In the spring of 2007, Wall Street was basking in a "golden age" of private equity and deals. Regulators believed the subprime implosion could be contained. "Troubles in the subprime sector seem unlikely to seriously spill over to the broader economy or the financial system," Bernanke told a South African audience on June 5, 2007.
And on August 9, President Bush sought to play down the jitters in the market, saying that "the fundamentals of our economy are strong."
How much has changed. His successor may now have to confront another year of financial pain.
"We are trying to refinance but are getting the runaround from the bank," Janeen, a Los Angeles homeowner, wrote on a CNNMoney.com Talkback. "[T]hey keep stalling, missing appointments and forgetting to send us paperwork."
Administration officials say they are well aware of the problems and are leaning on the banks to do better. Servicers will have to report the results of their efforts within the next month or two, opening them up to public and government scrutiny, said Seth Wheeler, senior adviser at the Treasury Department.
But don't expect the hurdles to go away anytime soon.
"Immediately, we want to see an improvement in borrower experience, but I don't think that means we will see a resolution of every hiccup in the process," Wheeler said. "We should see over the course of the summer real improvement, but those challenges will linger well into the fall certainly."
Under the Obama plan, people with little or no equity in their home can refinance to take advantage of today's low mortgage rates. The plan allows people to participate even if they have loans of up to 125% of the value of their property, as long as they meet other criteria.
Also, eligible borrowers who are in or at risk of default may be able to lower their monthly payments to no more than 31% of their pre-tax income through a loan modification. Homeowners, servicers and mortgage investors can receive incentives to entice them to participate.
Announced in February and implemented by most servicers starting in April, the program has produced more than 200,000 trial modifications and 20,000 refinancings. Borrowers in the loan modification program must make three on-time payments before the adjustment is considered official.
Foreclosures rising
While the administration often highlights that the program has helped a lot of people in a short period of time, it has a long way to go if it is to truly stem the foreclosure crisis, experts say.
Nearly 1.5 million homes have received a foreclosure filing in the first five months of the year, according to RealtyTrac. Defaults are on track to hit 3.5 million this year, according to Mark Zandi of Moody's Economy.com.
Foreclosures in process jumped in the first quarter by 22% over the previous quarter, according to data released last week by the Office of the Comptroller of the Currency and Office of Thrift Supervision. The number of mortgages that were more than 60 days past-due rose 7%, but delinquencies among prime borrowers with the best credit backgrounds soared nearly 20% as rising unemployment takes its toll.
"This system is not running at the level of efficiency that it has to," said Barry Zigas, director of housing policy for the Consumer Federation of America.
Getting through to the banks isn't easy.
Distressed borrowers have told CNNMoney.com that they are in danger of losing their homes because their banks are not able to handle the flood of applications for the president's foreclosure prevention plan. In addition to problems with lost documents and endless waits on hold, borrowers complain they never receive an answer or are told they can't be helped because they are still current with payments.
Tanya in Jacksonville, Fla., wrote in the Talkback that she has contacted her servicer 27 times since applying for a loan modification in April, faxed all the documents six times and is still not getting help. "So still I wait. Still I have no assistace[sic] in my loan!"
"Now it has been a month since I returned all the proper paper work and have received no correspondence," wrote Craig of Howell, Mich., who is seeking to refinance. "I call the loan officer I spoke with at least once a week and she refuses to return my phone calls!! Getting a person on the phone who is [knowledgeable] is next to impossible since everyone there makes Forest Gump look like Albert Einstein. I'm simply fed up with this whole process."
Housing counselors, who help distressed borrowers navigate the system, are quite familiar with stories such as these. Much of the bottlenecks stem from the fact that servicers have not hired nor trained enough staff, nor have they fully updated their computer systems to handle the administration's program, said Bruce Dorpalen, director of housing counseling for Acorn Housing.
"There's no excuse for this," he said. "The servicers are not able to make decisions, or good decisions."
Still ramping up
Banks and government officials say the foreclosure prevention program is very complicated, requiring a lot of training, system upgrading and documentation. Therefore, the institutions need time to ramp up.
"We have a new plan that's also more complex than any other plan," said Faith Schwartz, who heads Hope Now, a coalition of servicers, community groups and mortgage investors working to stem foreclosures. "The banks have tripled, quadrupled their staffs. It will be effective. We'll see more in the fall."
Citigroup (C, Fortune 500), for instance, said it is trying to resolve cases as expeditiously as possible, while JPMorgan Chase (JPM, Fortune 500) has touted the fact that it had approved 87,000 applications by June 30. Both banks said they are looking to improve.
The Treasury Department is pressuring servicers to streamline the application process. And officials say they will check to make sure banks are following the guidelines.
The soon-to-be-issued reports will include how many loan modifications and refinancings have been extended and how many are underway at each institution. Servicers with low approval levels or high complaint figures will raise red flags. Also, the administration has hired Freddie Mac (F, Fortune 500), the mortgage finance firm now under the government's control, to check the applications that have been approved and rejected.
"It's not just that we're hoping that servicers get out there and get results," Wheeler said.
(click here for direct access to USA Today for full report on article details below)
Foreclosures grind on as lenders fail to modify loans
The Obama administration's $75 billion program to reduce foreclosures has been beset by backlogs and delays, leading many overstretched homeowners to complain about unreturned phone calls and inaccurate information from lenders, while others say they were denied help for reasons that weren't clear
Details of the plan were unveiled in early March. The goal is to prevent up to 4 million foreclosures by having banks modify loans into more affordable monthly payments.
Since its debut, the plan has led to offers of more than 190,000 mortgage modifications with lower monthly payments, according to the Treasury Department. During that time, lenders either have started or advanced foreclosure proceedings against more than 1 million homes, according to RealtyTrac. About 20% of those were foreclosed upon and repossessed. The Center for Responsible Lending says 2.4 million Americans are at risk of foreclosure in 2009, and 8.1 million could be over the next four years.
Homeowners who apply for mortgage modifications are finding that banks typically are taking 45 to 60 days to respond to inquiries, according to a report this month by NeighborWorks America, a provider of foreclosure-prevention counseling.
Some homeowners who applied for mortgage modifications five months ago still have no answer on whether they will be able to arrange smaller monthly payments, leaving them uncertain whether they'll keep their homes or lose them shortly.
"Some lenders may not be turning (homeowners) down right away because it might be politically easier to push them off and delay," says Joel Naroff at Naroff Economic Advisors. "No one will admit they're doing this."
Naroff also says banks today are dealing with even more demand for mortgages, including refinancings, than during the peak of the housing bubble in 2006, and the backlog is likely to get worse as more homeowners lose their jobs. Mortgage delinquencies have been growing in areas where unemployment has been rising fast, and even homeowners who successfully get modified mortgages could face trouble later if their incomes or home values fall.
Lenders say they're doing the best they can with a tsunami of requests, but some industry officials say delays are hampering efforts to revive the housing market.
"The loan-modification program is suffering. What we're doing right now isn't working as expected," says Richard A. Smith, CEO of Realogy, the parent company of Century 21, Coldwell Banker, Sotheby's International Realty and ERA. "The delays are horrible. Banks, unfortunately, just weren't geared up for this."
This month, Sen. Jack Reed, D-R.I., and 14 other senators wrote a letter to Housing and Urban Development (HUD) Secretary Shaun Donovan and called for a new strategy to get lenders to respond to homeowners faster.
"Of particular concern are homeowners who have been instructed by HUD-approved counselors to contact their (loan) servicers only to be rebuffed or, worse, never even reach their servicer," it said.
Robin and Craig Doyle of Woodland Hills, Calif., have been trying to get a loan modification through their lender, JPMorgan Chase, since February.
Robin, who does freelance writing from home, said she initially was told to send a letter describing her hardship, paycheck stubs, tax returns and other information.
She assembled a 200-page file and sent it along. A month later, she was told she had to redo the information because the file she'd sent had become outdated.
Another time, Robin says, she was told her file had been mistakenly closed altogether. On another occasion, she was told the request couldn't be processed because she hadn't included information about a homeowner association fee, even though her family doesn't belong to such an association.
"I've had to resend it four times," says Robin, 35. "It's making me sick. It's been five months. I've spent hours and hours on this and sleepless nights. It's foremost on my mind. I look at my beautiful home and wonder if I'll have it next month."
The Doyles pay $5,031 a month on a mortgage of $947,000. They have an interest-only loan at a 6.3% rate that will reset in about seven years. On interest-only loans, borrowers pay only interest for a specific period to temporarily reduce the payments. After that, they pay interest and principal.
Craig, a writer in the television and movie industry, is still finding work but not as much as before. This is the first month the family has failed to make its mortgage payment.
"I feel like Obama's plan has done absolutely nothing," says Craig, 38.
Jennifer Zuccarelli, a Chase spokeswoman, says there were miscommunications in the Doyles' case, and the bank is working to resolve the situation. It also has added about 950 loan counselors the past six months.
"We're hiring hundreds more every month," Zuccarelli says.
After USA TODAY contacted Chase for comment, the Doyles say the bank told them the next week to resubmit their application. They later were told they don't qualify for the Obama plan because their loan amount is too high.
Bonuses for mortgage collectors
Other major lenders say they are beefing up staffing to process modification requests. Some say it has taken time because details of the Obama administration's plan weren't outlined until March.
Under the plan, if the borrower's monthly payment is reduced by 6% or more but not below a 31% mortgage-debt-to-income ratio, the servicer can receive success payments of up to $1,000 for three years, provided the borrower stays current.
Once a three-month trial period is complete and loan documents are signed, the servicer is entitled to a one-time $1,000 incentive payment and the investor receives a $1,500 check.
The investor incentive is important because the program is targeted mainly at hard-to-modify loans in certain mortgage-backed securities.
Loan modifications can help borrowers by reducing mortgage principal, the interest rate or the term of the loan. The government also has set aside money to help up to 5 million families refinance into safer long-term mortgages from risky kinds of adjustable mortgages whose payments could soar to unaffordable levels.
Those who don't qualify for either refinancing help or loan modifications under the government's program are counseled on other alternatives to foreclosure, such as short sales where lenders agree to a home's sale for less than the mortgage balance.
Bank of America reports that it modified about 232,000 mortgages last year. During the first four months of this year, it has completed about 157,000 modifications — all before the Obama housing rescue plan went into effect.
To settle claims brought by attorneys general in 11 states, Bank of America last year agreed to modify loans for homeowners holding riskier loans that often balloon into larger monthly payments later. The claims involved mortgages that originated with Countrywide Financial, which Bank of America took over in 2008.
Bank of America expects to begin processing applications from homeowners who are current with their mortgage within a few weeks.
Treasury Department officials say 16 mortgage servicers — the companies that collect homeowners' monthly payments — have signed up to participate in the program. They say they are aware of servicer delays.
"Treasury continues to pursue strategies to help servicers reach more borrowers faster. Given the fragile state of housing markets, we will need to continue to do more to ensure loan modifications are occurring at scale under our program," says Meg Reilly, a Treasury spokeswoman.
Lenders say they need to take time to review each application so that the modifications are meaningful. Some economists also warn that rushing approvals could result in modifications that only delay foreclosures rather than prevent them.
'I don't know who to trust'
Some applicants who were turned down say they don't understand why.
Judy Lederman, 49, of Scarsdale, N.Y., a freelance writer after losing her full-time job in public relations a year ago, says she tried to get a modification with Chase about three months ago. She has an interest-only loan at 5.25% that resets in one year. How high it will rise depends on interest rates then.
She says Chase denied her request a few weeks ago because she has an adjustable-rate mortgage, but other borrowers with ARMs are getting modifications under the Obama plan.
"They kept me on hold and waiting for months. I bent over backwards to get them what they needed, but it was like no one was home," Lederman says. "I really don't know what else to do. I don't know who to trust."
The day after USA TODAY called Chase for comment, Lederman says the bank called her. She says the representative told her she was turned down because of missing information and that new forms to apply for a modification were being expedited to her home. "There was some miscommunication, but we have reconnected with the borrowers and are working on finding solutions for them," Zuccarelli says regarding the complaints about Chase.
(click here for direct access to CNN for full report on article details below)
The next wave of mortgage defaults
More borrowers with good credit are defaulting on their home loans, and that's going to make it even harder for the staggering housing market to recover.
NEW YORK (CNNMoney.com ) -- Prime mortgages are starting to default at disturbingly high rates - a development that threatens to slow any potential housing recovery.
The delinquency rate for prime mortgages worth less than $417,000 was 2.44% in May, compared with 1.38% a year earlier, according to LoanPerformance, a unit of First American (FAF, Fortune 500) CoreLogic that compiles and analyzes residential mortgage statistics.
Delinquencies jumped even more for prime loans of more than $417,000, so-called jumbo loans. They rose to 4.03% of outstanding loans in May, compared with 1.11% a year earlier.
And prime loans issued in 2007 are performing the worst of all, failing at a rate nearly triple that of prime loans issued in 2006, according to LoanPerformance.
"The extent of how bad these loans are doing is very troubling," said Pat Newport, real estate economist with Global Insight, a forecasting firm.
Washington Mutual (WM, Fortune 500) CEO Kerry Killinger said last month that the bank's prime loan delinquencies are on the rise. As of June 30, 2.19% of the prime loans issued by WaMu in 2007 were already delinquent, compared with 1.40% of prime loans issued in 2005.
Also last month, JP Morgan Chase (JPM, Fortune 500) CEO Jaime Dimon called prime mortgage performance "terrible" and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier.
The latest shoe
Prime loans are just the latest class of mortgages to suffer a spike in failure rates. The first lot to go bad was, of course, subprime mortgages, whose problems set the housing meltdown in motion. Next were the Alt-A loans, a class between prime and subprime loans that doesn't require strict documentation of a borrower's assets or income.
Now, as prime loans are added to the mix, the resulting foreclosures could haunt the housing market for a long time, according to Global Insight's Patrick Newport.
"Home prices will drop for quite a while - maybe several years," he said.
Prices are already off nearly 20% from their 2006 highs, according to the S&P/Case-Shiller Home Price index.
And there's a strong inverse correlation between home prices and defaults, according to Lawrence Yun, chief economist for the National Association of Realtors.
"It's a feedback loop," he said. "Price declines lead to more defaults, which leads to more price declines."
More foreclosures will add to an already massive oversupply of homes on the market. Inventories are up to about 11 month's worth of sales at the current rate.
Indeed, about 2.8% of all homes for sale were vacant as of June 30, according to Census Bureau statistics. That's up about 50% from three years ago, and near historic highs.
More foreclosures, fewer loans
The failure of prime mortgages will also make it more difficult for new borrowers to find affordable loans - and that will slow sales even more. Lending standards have been tightening for months, but if prime loans start to look risky, lenders will be even more conservative about who gets a mortgage.
About 60% of the loan officers surveyed reported that they tightened lending standards for prime mortgages during the first three months of 2008, according to the April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices from the Federal Reserve, which is released quarterly.
That number will likely be even higher for the second quarter, according to Mike Larson, a real estate analyst for Weiss Research. "It's already harder and more expensive to get loans," he said. "Lenders pull in their horns when things go south."
While easy credit fueled the housing boom, restricted credit is certainly contributing to the bust.
"Eventually," said Newport, "time will break the cycle. Pricing will drop enough to attract more buyers, and inventories will decline."
But there will probably more hard times ahead before markets come back into balance and recovery begins.