Loan Mod Program Leaves Some Homeowners Worse Off

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

If Lauten can't come up with the money, her only options are to sell the house for less than the outstanding mortgage amount (a so-called short sale) or hand the house over to the bank. Now that Lauten is faced with losing her house, she wishes she never agreed to a trial modification in the first place.

"I would have sold furniture or something" to make the original payments, she said. "I would have done what I had to do."

Many homeowners may have also been allowed into the program because in addition to not verifying income, banks sometimes also failed to run all the necessary tests before hand to see if they qualify. And when they finally do run the tests, they sometimes make mistakes, again leaving homeowners in a difficult spot.

Marial Fernandez was in a trial modification for months before the bank ran what's known as a Net Present Value test, an opaque calculation developed by the Treasury Department that determines whether the loan modification is in the best interest of the investor. Those tests are supposed to be run before a homeowner is ever offered a trial. When her bank, Chase, finally performed the test on Fernandez, the result turned up negative and she was kicked out of the program - seven months after she started.

Chase also sent Fernandez's a statement saying she owed $22,000 in back payments she accrued during the trial, including late fees.

Fernandez felt misled. "I don't feel they disclose that if this trial period doesn't work for you, you're going to owe $22,000 at the end," she said. "We would have looked for something different."

The bank apparently made an error when it ran the NPV test. It wasn't until calls from ProPublica that her case was given more scrutiny.

Just days after we contacted Chase inquiring about Fernandez's situation, the bank offered her a permanent loan modification under better conditions than her trial. "During the trial process, we required additional information and, after some confusion, approved the loan for permanent modification," Chase spokesman Tom Kelly wrote in an e-mail.

Kelly said Chase started trial modifications for delinquent borrowers not only without first confirming their income but also without running an NPV test "in order to keep them from falling further behind." He added that for homeowners who were current, documented proof of income was obtained and NPV tests were done prior to making trial offers.

Fernandez's new modification would have reduced her payment to about $1,500 per month from $3,100, but she decided to turn down the offer because her home was worth less than half of the loan amount. Wells Fargo said in a March press release that half of its trials will end in denials, and the second-most common reason is because of NPV failures.

"If you put people in a trial plan without verifying that they're going to be able to go anywhere with it, it's just a collections tactic," said Sitkin, the housing attorney. "Maybe they bought a little extra time, but really that's money they could have been saving up for another place."

Reporter Paul Kiel contributed reporting to this story.