Loan Mod Program Leaves Some Homeowners Worse Off

Ryan Knutson | 5/16/2010, 11:18 a.m.

Susan Lauten had done everything right during her trial mortgage modification under the government's program to help struggling homeowners. She had submitted all the necessary paperwork and made the required trial payments on time each month.

Trial modifications are supposed to become permanent after three months of successful payments. But even though she held up her end of the deal, she found herself booted from the program, joining a swelling number of homeowners who are finding themselves in a situation that's worse than if they had never entered the program to begin with.

And it's just the latest example in a litany of problems that have beset the government's efforts to save millions of struggling homeowners from losing their homes.

Once they've been denied a permanent modification, homeowners owe the amount they were discounted during the trial. Banks often demand that the entire amount be paid as a lump sum right away or over a short period of time, causing a homeowner's payments to swell beyond the original monthly payment.

What's more, homeowners' credit scores are damaged because trial payments are reported to credit agencies as delinquent or as part of a payment plan.

"Being in a trial modification if you don't get a permanent modification is worse than having not been in a trial modification. Period," said Diane Thompson, an attorney with the National Consumer Law Center. Worse yet, people "may have a hard time finding alternative housing because some renters check credit scores," she said.

Last year, a million Americans were given trial mortgage payment modifications by banks and other companies that service mortgages. The Treasury Department has in turn provided financial incentives to the banks. But the Treasury Department encouraged banks to start trials quickly, causing banks to make trial offers to people without fully vetting their eligibility, and ultimately letting in many homeowners who were destined to fail.

After lingering for months awaiting final approval, thousands of homeowners are now being dropped from the program as banks eventually decide they don't qualify.

For those who were current on their mortgage payments when the trial started, this can be especially brutal. If a homeowner can't afford the sudden increase in the mortgage payment, the servicer can begin the foreclosure process, whereas prior to the trial they may have been eligible for other financing options.

More than 155,000 homeowners have been dropped from the program after starting trial modifications. Some of those were denied for legitimate reasons, such as missing a trial payment or experiencing a drastic change in income, but others were kicked off because of errors at the banks.

These numbers are expected to continue to rise. There are nearly 800,000 homeowners in trial modifications, and the Treasury expects one third to one half of the program before their modifications become permanent.

Lauten, the homeowner who was denied a modification after being in a trial for months, is now dealing with this reality. After losing her job at a university clinic last July, she wrote to her bank, Wells Fargo, explaining she would need help with her mortgage in the coming months. In September, Wells Fargo replied, offering a modification that brought her payments down to $433 per month from more than $900.