In the terribly polite confines of the conference center at the Jacob Javits Federal Building in lower Manhattan, no one heckled, but front-line foreclosure prevention workers seemed to be engaged in a contest: How many ways can you say "frustrated"?
They are frustrated because while various state and federal initiatives have set out to help homeowners avoid foreclosure, precious few distressed borrowers are actually getting help.
All the laughing was taking place at a Home Foreclosure Prevention Summit sponsored by the U.S. Department of Housing and Urban Development, the bank-regulating federal Office of Thrift Supervision, a national network of nonprofit community development organizations called NeighborWorks and the Center for New York City Neighborhoods, a nonprofit set up by the city to respond to the foreclosure crisis. The daylong conference revealed the breadth of distance between foreclosure prevention workers, who offer free advice to homeowners at risk of losing their homes; banks and servicing companies, who hold the power to rewrite loans; and government regulators.
"I think we need to step it up," said Sarah Gerecke, executive director of the Furman Center for Real Estate and Urban Policy at NYU. "What we want is a system that we can rely on and feel secure in."
That's not the current landscape. The Center for New York City Neighborhoods found that of the 4,652 homeowners who've sought assistance from the center's 30 partner agencies since July 2008, 1,429 applied for loan modifications. But only 330—less than a quarter—were offered ways to make their mortgage affordable, whether through interest rate adjustments, extensions to the life of the loan or lowering the principal. It's not only that servicers are denying requests, the advocates said; it's that they can take months to even begin reviewing an application.
"I am very frustrated with the paperwork with servicers," said Eileen Anderson, senior vice president at Community Development Corporation of Long Island. "In my office we call it a fax-shredder," she said, venting about the difficulty of communicating with loan servicers who, advocates say, habitually lose modification applications.
The Homeowner Affordable Mortgage Program (HAMP), initiated by the Obama administration in April, was intended to permit homeowners at risk of losing their house to negotiate with the bank for lower interest rates or smaller mortgages. The theory is that it is in the interest of banks—or loan servicers who manage mortgages for banks and investors—to renegotiate the terms of a loan, rather than see a property go into foreclosure. The logic was that it was better for the bank or servicer to have loans repaid over a longer term or at a lower interest rate than to end up with an inventory of uninhabited real estate.
HAMP is available to homeowners who are less than a month behind on their mortgage who can demonstrate a hardship (such as loss of job) and those more than a month behind. The goal is to adjust payments such that homeowners are directing only 31 percent of their income to housing. HAMP is voluntary. Banks and servicers can choose to participate. If they do, they get a $1,000 incentive for each modification successfully completed. By the end of October, 650,000 trial modifications had begun through the program, the Treasury Department announced last week.
But that progress masks deeper problems, said Rene Arlain, housing director for the Cypress Hills Local Development Corporation, who said his organization now sees 1,000 families in foreclosure each year, up from 400 before the crisis. "We're just touching the tip of the iceberg: people who are actually in foreclosure," he said, explaining that hundreds more are barely holding on, staying one step ahead of their mortgage.
Cypress Hill LDC has seen an uptick in trial modifications in the past three months, Arlain said, but actual modifications—permanent rewriting of the terms of the mortgage—are slow in coming. And too many trial modifications, which are three-month arrangements during which homeowners have to make the adjusted payments and meet other requirements, end without a true modification offer, he said.
Behind the delays
Indeed, foreclosures continue to accumulate at a pace of one every thirteen seconds nationwide, dramatically outpacing any efforts made under HAMP. A recent study by the non-partisan Center for Responsible Lending finds that there are 5 million homes nationwide either in foreclosure or more than two months behind on payments as of July 1, but that there have been only about 300,000 finalized modifications.
A New York state law requires conferences between homeowners and banks or servicers before every foreclosure, and in the Empire State today, 28,773 trial modifications are underway, according to records of the Mortgage Bankers Association and Treasury Department. But there have been twice as many—61,917—new foreclosures statewide this year, according to estimates by the Center for Responsible Lending. And in the five boroughs, 13,305 homes have begun foreclosure proceedings or been sold at auction since HAMP went into effect in April, according to the city's Department of Housing Preservation and Development.
Advocates and servicers cite a host of reasons for the delays and derailments of modifications under HAMP.
Meghan Faux, director of the foreclosure prevention program at South Brooklyn Legal Services, said bad data is leading servicers to deny modification requests. "We need to know the data, to see if they are even using good information," Faux said. "More often than not, when I've been able to check, they've been using inaccurate measures."
Interacting with homeowners in a detailed, individualized way is new for servicers, who previously simply collected payments and fees, said Vicki Bott, deputy assistant secretary for single family housing at HUD. It was Bott's opening remarks that made the foreclosure prevention counselors like Faux laugh. But she and others argued that modifications have been slow in coming because servicers had to hire new staff and set up new offices and procedures to begin participating in HAMP, dramatically re-imagining their work—something that takes time.
"I know that our industry is imperfect and takes patience to work with," said Dana Dillard, a senior vice president of special mortgage initiatives for GMAC Mortgage, who had the unenviable role of representing servicers at the conference. She is a chairperson of the HOPENOW alliance, a collection of lenders, servicers and counseling outfits working to respond to the foreclosure crisis. "We're trying to be innovative, but we are a big ship that takes a lot to turn." Capacity is a major issue for servicers, she said, echoing Bott.
Dillard said unresponsive borrowers also slow modifications, and that borrowers routinely submit incomplete paperwork. In addition, some investors—who own pieces of the mortgages—are resistant to modifications and need to be convinced, she said. She pointed out that the 40-plus servicers in HOPENOW make modifications outside HAMP as well.
Michael Hickey, executive director of the Center for New York City Neighborhoods, said he is not particularly hopeful that the process will get fixed right away.
When the Center for New York City Neighborhoods observed foreclosure conferences in courtrooms across the city last summer, it found servicers and attorneys for the banks routinely unprepared to negotiate payment plans, unfamiliar with the details of borrowers' cases and not empowered to actually make a modification or payment plan offer. The servicers rarely came to court with a phone number for the servicing company that actually led to a person who was authorized to make settlement decisions.
An October report from the National Consumer Law Center suggests it isn't in servicers' financial interest to make modifications. Despite the $1,000 per completed modification under HAMP, servicers make more money continuing to collect fees on delinquent mortgages than modifying them, the report says. A major portion of their earnings is based on a percentage of the mortgage principal. Lowering that principal would cut into their revenue. And even if a mortgage eventually goes into foreclosure, the servicer is made whole, and can collect all those months of accumulated fees at auction. The servicers get paid first—ahead of investors—at auction.
Responding to skepticism about whether servicers actually want to offer avoid foreclosure, Dillard said her industry is certainly on the team. It just takes a while to get up to speed.
"Servicers are used to getting beat up. But we do believe modification is certainly preferable to foreclosure," she said.
During the course of the conference, an estimated 1,662 American homes went into foreclosure.