By Robert Brannum
Can it get any worse? Yes, it can. And it often does.
Thousands of homeowners across New York have fallen behind on their mortgages and find themselves in still worsening circumstances – with more money spent and more time lost – without improving situations. Why? They are among the many who have sought the services of loan modification companies.
Loan modification background
A true loan modification is what its name implies: an agreement between lender and borrower to change the original terms of a loan, usually due to changing circumstances of the borrower. A modification restructures a current loan by granting new terms on loan length, interest rate, loan type, and even outstanding principal balance. Typically, loans are modified by lenders reducing current interest rates for a few years to enable borrowers to “catch up,” or by taking delinquent payments and adding them to the back-end of the loan, in the hope that keeping the loan current will enable a borrower to emerge from the rough economy with house intact.
Borrowers, facing the potential loss of their homes, have been seeking modifications as alternatives to foreclosure; lenders, faced with a growing number of troubled loans over the past few years, have been offering modification programs as a way to keep revenue generating and to avoid being saddled with too many repossessed homes.
Although it may theoretically sound like a win-win situation in this time of economic bleakness, the reality is far different for many New York homeowners.
Challenges rooted in industry structure
Although the Obama administration announced its $75 billion Making Home Affordable Program in March, it has been much criticized for the slow pace at which it has actually aided troubled consumers. While it has been disparaged by many industry economists as being too small to help the masses, the program faces challenges at the industry level that seemingly point to loan servicers who operate with a lack of urgency. The key element of the Obama program, called the Home Affordable Modification Program (HAMP) is designed to help as many as 4 million struggling homeowners avoid foreclosure by modifying loans to an affordable and sustainable level. Once a loan servicer has confirmed a borrower’s eligibility, the servicer will work to adjust the monthly mortgage payment to 31 percent of a borrower’s total pretax monthly income, primarily through interest rate reductions (to as low as 2 percent) and through term extensions (to as long as 40 years). If necessary, a portion of the principal can be deferred until the loan is paid off.
One common argument is that servicers drag their feet when it comes to offering loan modifications because it benefits them financially to do so: a recent report issued by the National Consumer Law Center suggested that there is more revenue for servicers when they collect fees on delinquent loans than when they try to modify the loans. A significant portion of the service companies’ fees are based on the outstanding loan principal, and lowering those principals through modifications puts downward pressure on these revenues. The argument continues that, even if the loan does go into foreclosure, it’s the lender who really suffers – the loan servicer collects all outstanding fees, and so really has nothing at risk when loans fall further in trouble.
Loan servicers, who are more accustomed to collecting and processing loan payments, counter that counseling consumers on modifications is a relatively new task, which has required significant new staffing and training, and which takes time.
Recently, The Center for New York City Neighborhoods reported that of the 4,652 city homeowners who have reached for assistance since July 2008, 1,429 applied for a loan modification but only 330 received modification assistance. Modification advocates admit it can take months for servicers to even begin reviewing a modification application.
Regardless of the cause, the fact remains that with the need for mortgage assistance steadily rising and with state and federal assistance options slowly ramping up to serve them, many suffering homeowners have resorted to another options.
Bad situations made worse
With federally-based programs rolling out too slowly to save their homes, many consumers instead seek out so-called “loan modification companies” for help. These foreclosure rescue businesses offer to negotiate with the borrower’s lender on the borrower’s behalf, promising to help lower their interest rates, convert adjustable rates to fixed, get delinquent payments and fees forgiven and even lower the balance outstanding. But many of these operations ran afoul with the law earlier this summer.
In early July, Attorney General Andrew M. Cuomo announced an investigation of 15 loan modification companies, alleging consumer fraud. In August, Cuomo followed his investigation with a lawsuit against those 15 firms under the state’s consumer protection laws. Among the state’s charges were that the firms were illegally charging upfront fees for their loan modification services, which is in violation of state law.
Cuomo also claimed that the companies were engaging in deceptive business practices, making misleading statements on their Web sites and through advertising about their effectiveness; one firm claimed it had a 90-100 percent success rate.
One of those firms, the New York-based American Mortgage Company, known as Amerimod, was singled out by Cuomo. In a statement the attorney general said, “Amerimod shamelessly took advantage of thousands of vulnerable homeowners desperately trying to save their homes. By charging up-front fees and making misleading and deceptive claims about its ability to prevent foreclosure, Amerimod blatantly ignored the law and tried to squeeze the lost dollars from struggling consumers nationwide.” Among other things, the lawsuit against Amerimod seeks a court order prohibiting the company from further marketing and providing loan modifications in New York.
In many cases, according to many consumer complaints received by the state, once those initial payments were made, the firms were difficult to reach for status updates or customer service support. The Web site ConsumerAffairs.com quoted an unidentified customer who claimed he hasn’t been able to reach anyone at his loan modification company, Federal Loan Modification. “I have two other numbers, [but] all have been disconnected in the last few days,” he said. “They took my money and basically ran.”
Help on the horizon?
Once a loan modification is obtained, what kind of relief does it provide the borrower? One government study showed that many borrowers who received a modification soon fell behind again; the study indicated that 53 percent of borrowers who had modifications made to their loans between January and March 2008 started to again miss payments within six months.
However, despite the lag in federal programs, and the high levels of fraud claimed by the attorney general, New York foreclosures declined in October. The Treasury Department reported that New York ranked fourth in the country for loan modifications as of October 31, with nearly 28,000 (see chart).
According to an industry report, the number of foreclosures for sale in New York dropped from its September total. In October, 4,797 homes went into default or foreclosure, but only 493 were repossessed by banks, which puts the state relatively low on the foreclosure activity scale.
While the modification programs are still in their infancy and their long-term benefits still unclear, there appears to be a meaningful connection between New York’s rising modification volume and falling number of repossessions. Until the economy improves, legitimate loan modification programs may represent the best lifeline to keep struggling New York homeowners in their homes.
Robert Brannum is a freelance writer based in Boston with special expertise in the finance industry.