Loan Mod Program Leaves Some Homeowners Worse Off

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

For homeowners who are current on their payments, mortgage servicers, the companies that handle modifications and foreclosures, have always been required to obtain documented proof of income before offering trial modifications. But Wells Fargo didn't ask Lauten for them until after she started making trial payments, she said. (Citing confidentiality, Wells Fargo declined to comment on Lauten's case.)

Lauten made the reduced payments for seven months, but was told in March that she'd been denied a permanent modification, after the bank seems to have decided her income wasn't sufficient. The difference between the regular payments and reduced payments accrued during the trial period, meaning Lauten now owes $2,200 on top of her payments, which have returned to more than $900 a month. According to a letter Wells Fargo sent Lauten, the bank gave her one month to pay back the $2,200, or else the bank would begin the foreclosure process.

"I had no choice," Lauten said, adding that she's scrambling to come up with the money.

The denial could have been avoided - by way of never offering a trial in the first place - if Wells Fargo had verified Lauten's income before it gave her a trial modification.

When a trial is granted without proper documentation, a homeowner can be denied even if both the bank and the homeowner act in good faith to do everything right. For example, homeowners may not understand exactly how banks calculate income under the program. That can lead to miscommunications, causing the servicer to offer a modification that the homeowner was not eligible for, said Lisa Sitkin, a staff attorney at the Bay Area-based Housing and Economic Rights Advocates.

Unlike homeowners who were current, Treasury initially told banks it was okay to rely only on stated income for trial offers to homeowners who were 60 days or more behind on their mortgage, the logic being that it would prevent delinquent homeowners from falling even further behind on payments.

Speaking at a Mortgage Bankers Association conference in February, Laurie Maggiano, a Treasury official who sets policy for the modification program, acknowledged the low bar for letting people into the program.

The strategy was "just get 'em signed up," she said. People got in on "on a wing and a promise."

This method of signing homeowners up who were delinquent and relying only on their stated income has been criticized by housing counselors, and it mirrors the questionable way people with shaky finances were given subprime mortgages in the first place.

Earlier this year, the Treasury Department announced new rules for the program, making it mandatory for servicers to review documentation for all homeowners before beginning a trial - regardless of whether they are current. The change, which applies to all trials starting June 1, will likely result in fewer homeowners' being denied after making trial payments.

The cost of that, of course, is "it could mean that fewer trial modifications are offered," housing attorney Sitkin said. But "if they do it right, we should be seeing that the rate of conversion from trial to permanent should go up considerably."