Mortgage Mayhem: Americans Seek Do-Over

A special series details the problems homeowners face when seeking mortgage-rate modifications.
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Editor's note: This article was updated to revise a list of mortgage "workout shops."

TheStreet presents its three-part "Mortgage Mayhem" series -- a look at the government's "Making Home Affordable" program and the struggles of homeowners seeking a mortgage-rate modification -- in its enitirety below.

NEW YORK (

TheStreet

) -- A year and a half after the Obama administration unveiled a sweeping rescue plan for homeowners, surprisingly few have been rescued.

>>Foreclosure Nation: A State-by-State Interactive Map

The $275 billion

"Making Home Affordable" program

had the potential to reach up to 9 million troubled homeowners, according to initial estimates. Instead, paperwork delays, confusion over eligibility requirements and hesitance of banks to participate has left millions out in the cold.

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  • Just 24% of borrowers eligible for a federal mortgage-modification program have received permanent mortgage modifications. While 1.6 million homeowners were eligible as of the last report, more than half a million had abandoned the program, seeking other solutions or falling victim to the housing market's collapse.
  • Since its inception in February 2009, nearly 6 million homes have received foreclosure filings, according to RealtyTrac -- despite a foreclosure-moratorium that predated the program and lasted through March.
  • In desperation, homeowners have handed millions of dollars to shysters promising fast-track solutions. No less than five federal agencies and attorneys general in more than 30 states have taken action against thousands of such individuals. Yet the government response has been uncoordinated and unhelpful to those who most need assistance.
  • The banking industry has taken a woefully long time to help its customers. Yet solutions implemented by the industry have been more effective than the government's: 89% of homeowners who have gotten permanent modifications have done so through banks' proprietary programs.

The complexity and haphazardness of the mortgage-modification process has already frustrated millions of homeowners across the country. The backlog of homeowners requiring assistance has climbed as unemployment remains stubbornly high. False starts have threatened the progress of an economic recovery that now appears to be dangling by a thread.

Uncle Sam's Promises

President Obama unveiled the

"Making Home Affordable" program in February 2009 as a solution to a mortgage crisis that had clearly spiraled out of control.

"While this crisis is vast," said Obama, "it begins just one house and one family at a time."

Despite that simple pledge, the president's program has been plagued by difficulties and complaints from homeowners and mortgage servicers alike. It got off to a rocky start and performance has lagged ever since.

The most recent report, for June 2010, shows the number of eligible borrowers to be far shy of the administration's initial targets. Just 1.6 million borrowers now qualify for the most high-profile prong of the broader federal program, called the Home Affordable Modification Program, or HAMP. Others have been excluded because properties are vacant, or because owners earn too much money, don't owe enough money or haven't seen home values plunge far enough.

(

To hear Treasury spokeswoman Andrea Risotto discuss difficulties in implementing the program, click the audio button below.

)

An early problem with the administration's solution to the country's housing woes is obvious in hindsight: The industry was simply unprepared for the huge wave of refinancing requests it was about to face. Banks had shucked their employee ranks, particularly in battered mortgage divisions. It took months to drum up the manpower necessary to answer phones, send out paperwork and process requests.

Furthermore, the industry had been accustomed to handling delinquent borrowers through collections agencies, not in-house loss-mitigation divisions. This strategy shift took time to implement at the handful of giant mortgage servicers that hold a large concentration of the country's mortgage debt.

Meanwhile, the government was unclear about requirements and didn't cast a wide enough net to help the neediest borrowers. Just a month after its bombastic inauguration, the "Making Home Affordable" program was already

being restructured. Fannie and Freddie then altered their standards and created

technology platforms to help move things along. Then the program itself was

modified once again in March, amid continued criticism.

Even with the changes, banks have been unwilling or unable to cure many troubled loans using the government's prescription. The Treasury Department eventually attempted to shame banks into helping more homeowners by detailing their individual statistics in monthly reports, beginning in June 2009.

Most recently, the administration added a program called Home Affordable Foreclosure Alternatives, which advocates short sales and deed-in-lieu transactions as last-ditch tactics to avoid foreclosure, as well as a second-lien modification program, an unemployed homeowner assistance program and a "Hardest Hit Fund," which aims to provide billions of dollars in aid for the most economically depressed states.

"There isn't one solution for every household in America," says Andrea Risotto, a Treasury Department spokeswoman who focuses on the housing programs. "To an extent, that's what's made it an operational challenge for the government and for servicers, but why we keep trying to expand the options that are available for homeowners so we can find the best solution for each family."

(

To hear more from Risotto on additions to the Home Affordable Modification Program, click the audio button below

.)

Still, the early limitations of "Making Home Affordable" made it unworkable for many borrowers seeking assistance.

Fewer than 390,000 homeowners are now in permanent modifications through the Home Affordable Modification Program. Meanwhile, nearly 530,000 participants have canceled modifications and nearly 6 million homes have received foreclosure notices since the program's inception.

The Obama administration aimed $75 billion at this part of the program, but it has largely been a failure. Those funds were to be used to incentivize banks into modifying mortgages for "at-risk" borrowers. Participating servicers are now eligible to reel in far less - $28.7 billion, as of the most recent report - only after borrowers are placed in permanent modifications. The country's biggest servicers,

Bank of America

(BAC) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

Citigroup

(C) - Get Report

, stand to receive the most money from the program but

haven't been capitalizing on the opportunity much.

There are also indications that funds may have been improperly disbursed. Rep. Spencer Bachus (R-Ala.) proposed a hearing on the topic last week, following allegations from a former

Fannie Mae

(FNMA.OBB)

employee who said Fannie had pushed people into workouts improperly to receive funds.

On the other hand, some parts of the program have had success. Short sales and deed-in-lieu transactions have climbed

at a break-neck pace. The $200 billion devoted to purchasing securities from Fannie Mae and

Freddie Mac

(FMCC.OBB)

has also helped push down mortgage rates tremendously. Traditional 30-year fixed mortgages touched yet another record low of 4.44% in early August.

But low rates do little good for the big backlog of people who

can't take advantage of them -- held back by paperwork delays, servicer intransigence and an economic situation that isn't pretty. Unemployment remains high, consumer confidence is weak and small-business optimism is at historic lows.

For many Americans, refinancing dangles like a low-hanging fruit just out of reach.

"We see a huge disconnect between the health of Wall St. vs. Main St," says Matthew Tuttle, a financial adviser who runs a wealth-management firm in White Plains, N.Y. "The 0% interest rates have helped banks and brokerage firms increase profitability ... but the real economy is still mired in a recession."

Or, as Jack Reutemann, a financial adviser who heads Research Financial Strategies, puts it: "Where's the bailout for Joe the Plumber?"

Opportunists Sprout Up

While banks and regulators have frittered away precious time, others have sensed opportunity in the rubble of the housing market.

Call them savvy entrepreneurs or shady wheelers-and-dealers, but small mortgage-workout shops have sprouted up across the country like wildfire, promising to deliver results in a speedy fashion. They often have names that evoke a mix of strength, expertise and patriotism: Bank Modification Experts, American Home Relief, US Loan Relief or, simply, ObamaHousingPlan.net.

It's difficult for the average consumer to tell which companies are legitimate. The firms tend to use marketing lingo that paints them as helpful, non-profit consumer agencies, or associates them with the president's housing program.

For example, www.2009obamahomereliefplan.com is decked out in red, white and blue, with a video of President Obama at the top of the site. In a press release with a Washington dateline it promotes "Refinements to Existing Administration Programs Designed to Help Unemployed, Underwater Borrowers While Helping Administration Meet its Goals." It offers "drastic rate reductions," "elimination of fees and penalties" and the ability to "stop foreclosures immediately" through a 24-hour hotline.

Yet the site isn't directly associated with the federal government or its housing programs. Nor does it actually modify mortgages or stop foreclosures. It also presents inaccurate information, telling visitors that only first mortgages are eligible, when the administration has been prodding banks to participate in the second-lien workout program as well.

Efforts to contact 2009 Obama Home Relief Plan directly were unsuccessful. Charles Favor, a representative of a company reached through a phone number featured on the site, explained that it acts as a "lead-generator" to steer visitors to other third-party specialists like himself. Those specialists coach homeowners on presenting information in the most beneficial way to get a workout.

"Some of these people are inept at preparing their financial information," says Favor, who identified himself as manager of HLP Center. "We're for people who have been getting the run-around by their lender."

Favor explained that his group charges a fee of "a couple hundred dollars" to help customers pass two key tests to qualify for modifications subsidized by the federal government. One is a "waterfall" test, or a ratio of mortgage payments to gross income that must top 31% to qualify for federal assistance. The other is a "net present value" test, which needs to prove that a bank will receive more cash flow from a mortgage that has been modified than one that hasn't.

"It's either you pass or you don't," explains Favor. "We do it simple here; we try to do it as cost effective as possible, but anybody who tells you they're going to negotiate or settle your debt with your lender, you have to be leery of."

Those types of "specialists" can be more nefarious. They use dicey tactics to generate business, offer carefully-worded promises that are rarely delivered upon and require up-front modification fees that are illegal in certain states.

Recent scams highlighted by state and federal governments have targeted the elderly, naïve and poorly educated in the most troubled housing markets of the country. Some have appealed to immigrants who have trouble negotiating with banks because English isn't their primary language or they're intimidated by unfamiliar culture.

For instance, the Justice Department charged Yolette Antoine and Constance Powell with a "mortgage-fraud scheme" in June. The pair was allegedly involved in a ruse that promised immigration and home-loan assistance to members of Miami's Haitian-American community, then stole their identities to obtain $4.4 million in fraudulent mortgage loans. Court records indicate they pleaded not guilty at an arraignment on June 18.

Marisol Perez faces felony charges in Las Vegas, Nev., for promising to reduce mortgage payments within three months' time through her company We Save Your Home LLC. In an indictment last month, the attorney general's office said Perez charged homeowners $1,350 to $2,000 for her services but "failed to do any work on behalf of her customers" and refused to refund their money. Perez has been arrested and arraigned but has not yet entered a plea; her trial date is set for Sept. 20.

The U.S. Attorney for the Central District of California accused Gerald Guidry and Jeff McGrue of fraudulently promising to prevent foreclosure in exchange for fees and a title transfer. The two were arrested as part of a government sweep called "Operation Loan Lies" last year. Guidry pleaded guilty to conspiracy and making false statements in May and will be sentenced next month. McGrue pleaded not guilty; his trial is on hold pending a psychiatric evaluation.

Though actions have been taken at the local, state and federal level, it can be difficult for the average consumer to figure out just where to take a complaint. The main federal housing agency, the U.S. Department of Housing and Urban Development,has had a

mortgage-fraud site "under construction" for over a year while the Postal Service remains one of the most prominent prosecutors of illegal scams.

"You have to understand, with mortgage fraud, there are so many different agencies that prosecute," says Stephen Kodak, a spokesman for the Federal Bureau of Investigation. "I've seen Postal Service mortgage fraud cases; I've seen numerous Secret Service mortgage fraud cases. I guess it all depends on who picks it up first."

The most high-profile sweep was the FBI's "Operation Stolen Dream," whose preliminary findings were announced in June. The initiative resulted in hundreds of arrests and convictions related to 1,215 criminal defendants who allegedly swindled $2 billion through mortgage-related schemes.

Yet the feds have only been able to recoup $150 million for victims of such crimes. The most prominent cases related to home-flippers and builders who targeted banks by artificially jacking up prices -- not the new breed of ambulance-chasers running after desperate homeowners.

"Whether it's going to be on a federal level all depends on the threshold of money lost," says Kodak.

Banks Do Too Little Too Late

The banking industry has taken a great deal of time to help troubled homeowners and done a poor job by some accounts.

"We've had people who met guidelines through and through," says Favor, the mortgage modification specialist. "They fall right into the category of every criteria that's out there and the banks are just not helping people. They string them along through the loss-mitigation department and the attorneys don't even know they've foreclosed upon the house."

Additionally, the number of people assisted by banks pales in comparison to the number who defaulted or walked away from their homes. While it's difficult to gauge the precise number of homeowners who fall into the category of "troubled," somewhere between 3% and 5% of U.S. households are delinquent on mortgage payments, according to quarterly reports from major banks,

Fannie Mae

(FNMA.OB)

and

Freddie Mac

(FMCC.OB)

. That implies 3.4 million to 5.2 million households are now at risk of default or foreclosure, on top of the millions who have already faced the same fate.

Big banks have finally realized that the mortgage malaise won't stop spreading throughout their loan books until barrier walls are erected. They've started providing better workout solutions than those offered by the federal government, because banks have more flexibility to tailor modifications to individual borrowers' needs.

The question now is whether progress has come too late.

Despite initial unpreparedness, the country's four largest mortgage servicers --

Bank of America

(BAC) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

and

Citigroup

(C) - Get Report

-- have now added nearly 30,000 staffers to push borrowers through the pipeline more quickly. Hope Now, an alliance of financial firms that reaches out to at-risk homeowners, says the industry has completed 8.2 times as many successful workouts using their own solutions as those completed through the Home Affordable Modification Program.

"The latest results continue to support the industry's unprecedented efforts to assist borrowers across the country using myriad foreclosure prevention programs," says Faith Schwartz, senior advisor for the group.

Of course, banks aren't restructuring loans out of the goodness of their hearts. Besides prodding from the Treasury Department, workouts also allow them to improve the credit quality of their loan books, avoid hefty write-downs and stop the crisis from bleeding into more viable loans in surrounding areas.

For instance, Wells Fargo structured a plan to assist its most troubled borrowers, those who were part of

Wachovia's "Pick-A-Pay" program. Partly as a result, the bank now expects to receive $1.8 billion in income from some of the most impaired Pick-A-Pay loans, instead of losing money on them as initially expected.

Mike Heid, the co-president of Wells Fargo Home Mortgage who structured the program, says that "having a full range of options to address different customer circumstances is crucial to helping all of the borrowers who truly need assistance."

But the Pick-A-Pay plan also comes with strings attached.

Wells Fargo is letting those underwater borrowers with financial difficulties ignore principal and pay "interest only" for six-to-10 years. At that point, the bank believes the economy will have improved enough to restructure the loans into more profitable ventures. Right now, the plan allows Wells to publish sunnier loan statistics and avoid higher mortgage-related costs.

Wells Fargo, Bank of America and JPMorgan each report greater success outside of the Home Affordable Modification Program than within it. Perhaps unsurprisingly, the most aggressive champion of the program among large, money-center banks has been Citigroup, the only one in which the U.S. government still holds a large ownership stake. Even so, Citi has pushed less than 30% of those eligible through to permanent modifications.

Banks have been making more progress outside of the government-sanctioned box for a few reasons. The federal program wasn't structured to help all troubled borrowers. Banks don't necessarily want to help all of them, either, viewing some financial situations as too precarious. They'd also prefer to tout successes without federal assistance, if they can avoid it.

Through June, fewer than 390,000 eligible borrowers have moved through the Home Affordable Modification Program into permanent modifications and stayed there. Meanwhile, nearly 530,000 of those who received modifications have canceled them. Overwhelmingly, defectors have turned to alternatives offered by banks.

For instance, Bank of America has completed 665,000 mortgage modifications since January 2008 -- just 11% of which have fallen under the Home Affordable Modification Program. In May, Bank of America had difficulty even uploading files to the government's computerized system, leading to apparent inaccuracies in the Treasury Department data.

"When a customer is found to be ineligible for HAMP or falls out of a trial modification, we consider an alternative home retention program, and if no viable solution is available, a dignified exit from homeownership," Rebecca Mairone, an executive in Bank of America's mortgage division, noted when discussing July performance. She added that "HAMP guidelines are quite specific with regard to the debt-to-income ratio, owner-occupancy, trial payment performance and other requirements."

The picture isn't all rosy of course -- it took the industry roughly two years to accept a new philosophy about the mortgage market, in which losses aren't heaped solely upon homeowners. But now they're now reaching out to troubled borrowers across the country with a new pitch: Helping them stay in homes.

The Hope Now alliance has organized workshops across the country to connect homeowners with modification experts. Individual banks have promoted such events as well.

For instance, Wells Fargo CEO John Stumpf says the industry has offered suggestions to make the Home Affordable Modification Program "more friendly, more usable," but in the meantime his firm has been doing community outreach instead. Wells has been promoting what is calls "home preservation workshops" in cities like Atlanta, Baltimore, Chicago and Phoenix in recent weeks.

"We bring our people in," Stumpf says. "They are all hooked up online so people can sit down and have a modification done right at the event."

Those proprietary programs have been repairing the system -- in President Obama's words -- one house and one family at a time. Yet it's hard to tell when the long-troubled housing market will finally show consistent signs of stability.

Andrea Risotto, a Treasury Department spokeswoman, explains that progress has been slow in part because "the face of a person who is struggling has changed."

Problems are no longer isolated to irresponsible, naive or opportunistic subprime borrowers. Doggedly high unemployment and the continued depreciation of home values has been snaring responsible borrowers on an increasing basis -- "many of whom never thought they would be in this position," says Risotto. "They're struggling through no fault of their own."

(To hear Treasury spokeswoman Andrea Risotto discuss difficulties in implementing the program, click the audio button below.)

Meanwhile, second liens have presented another hoop for many borrowers to jump through before resolving their primary home loan. Each time the government starts to gain traction addressing one problem, additional challenges seem to be presented.

As a result, mortgage transactions have occurred in fits and starts since "Making Home Affordable" was first announced. There were desperation-driven booms in the first half of 2009 and spring of 2010 when federal incentives were unveiled or about to expire. Those booms have faded when economic reality sets in.

"I think we're sort of all learning as this shifts, as the economy ebbs and flows," says Risotto, "as servicers learn from their own implementation challenges and their own successes, and we're trying to remain as responsive as we possibly can."

Yet while the enormous amount of taxpayer assistance devoted to the housing crisis has brightened banks' profitability -- delivering mortgage-servicing fees and lowering funding costs -- it hasn't helped homeowners nearly as much.

"The president is coming out with how great this was and how this plan has been successful," says Favor, the mortgage-modification specialist, "and the bottom line is, it's getting worse. The whole plan has kind of backfired."

-- Written by Lauren Tara LaCapra in New York

.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.