We take calls all day long in our office from homeowners and Realtors who are frustrated with the short sale process.   HELLO!!   It is easier for the bank to simply foreclose. It takes serious firepower to get them to behave.

We have been battling and beating these guys for years but frankly it at times requires hauling them off into court to get them to “see the light”.   If you have Ocwen as your mortgage servicer you already know how difficult it is to deal with these numskulls.   Read on with “disbelief”.

- The Bank Slayer

In the email published below you will see the truth, straight from Ronald Farris, the president of Ocwen.  Below the email is the link to the video & credits for the entire story.

In a nutshell, agent Brian Gubernick, a Arizona agent, listed a home for a short sale.  He got short sale approval on Feb 26 but the approval was only good until March 1.  His efforts to have it extended until the end of the month and postpone the March foreclosure sale led him to contact multiple levels in Ocwen all the way up to the president. Ron Farris’s response to the request is shocking to those that think the bank wants to help homeowners.

Before reading the email here is an excerpt from Ron Faris published not long ago in the Palm Beach Post.

Reporter: What misperceptions do people have about your business?

Ron Farris:   Many people think that we originated the loans we service or they think we own the loans.  In most cases, we didn’t originate the loans, and we don’t own the loans. People also think that we make money by foreclosing on a home. Foreclosure is not only bad for the homeowner, but it is also bad for the investor in the loan because foreclosure almost always results in a loss. Foreclosure is also bad for Ocwen because we lose our ongoing serving fee revenue.

————————————————

Email from OCWEN President Ron Faris to Brian Gubernick on 3/13/10…

From: Faris, Ronald [mailto:Ronald.Faris@ocwen.com]
Sent: Saturday, March 13, 2010 8:59 AM
To: Brian Gubernick
Cc: Coykendall, Joshua
Subject: RE: OCWEN LN#XXXXXXXXXX – SHORT SALE for Borrower: XXXXX

Mr. Gubernick,

Can you help me understand how a short sale will help the homeowner?   My goal is to find a solution that keeps the borrower in their home.  If that is not possible, then there is no meaningful difference between a short sale and a foreclosure sale.  If you have a buyer for the property, we can always sell them the property post foreclosure sale.  As it looks like you are a real estate agent I can understand that you are concerned about losing your sales commission.

I suggest you have the borrower contact Mr. Coykendal to see if there is any way for us to do a loan modification.

Regards,

Ronald M. Faris

——————————————————–

View the entire story here in video format.

Let’s see what the IRS has to say:

The Mortgage Forgiveness Debt Relief Act of 2007 provides some relief from possible tax liability associated with foreclosure.  The IRS has published a list of ten facts it wants taxpayers to know about debt cancellation associated with Mortgage Foregiveness.

Straight from the IRS website:

1. Normally, debt forgiveness results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude up to $2 million of debt forgiven on your principal residence.
2. The limit is $1 million for a married person filing a separate return.
3. You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure.
4. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence.
5. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.
6. Proceeds of refinanced debt used for other purposes – for example, to pay off credit card debt – do not qualify for the exclusion.
7. If you qualify, claim the special exclusion by filling out Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.
8. Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions – such as insolvency – may be applicable. IRS Form 982 provides more details about these provisions.
9. If your debt is reduced or eliminated you normally will receive a year-end statement, Form 1099-C, Cancellation of Debt, from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed.
10. Examine the Form 1099-C carefully. Notify the lender immediately if any of the information shown is incorrect. You should pay particular attention to the amount of debt forgiven in Box 2 as well as the value listed for your home in Box 7.

If you are someone you know is facing a distressing mortgage situation contact our office today.

- The Bank Slayer

This is good and bad.

The good news is that hopefully most of the rip-off operations available through the internet will be out of business.  It has always been our belief that you should work only with local, Better Business Bureau-accredited companies.  Local is KEY.  You need professionals that understand your needs and can adjust to your schedule.  Only a local company (with real offices) and experienced personnel will be able to stay in the game and get the results you need.

Bad news is that there are legitimate loan modification companies that have the time, experience and knowledge to successfully hassle with your mortgage company everyday (while you’re at work) until a modification is approved.    These companies will now likely be kaput.

End result is this…HAMP related loan modifications are at times capable of being handled by non-legal personnel but anything beyond a HAMP modification (and even some of these) is a better fit for mortgage litigation.

- The Bank Slayer

The Federal Trade Commission proposed a new rule to prohibit third-party mortgage companies from charging upfront fees for foreclosure rescue and modification services.

The FTC brought 28 cases against companies that charge a fee, promising the borrower a modification from the lender. The cases allege these companies never provided the services promised and that they misrepresent their affiliation with the government and other housing assistance programs, including the Home Affordable Modification Program (HAMP).

“Homeowners facing foreclosure or struggling to make mortgage payments shouldn’t have to contend with fraudulent ‘companies’ that don’t provide what they promise,” said FTC chairman Jon Leibowitz ina press statement ^[1]. “The proposed rule would outlaw up-front fees so companies can’t take the money and run.”

The new FTC rule would also bar the companies from telling borrowers to end communication with their lenders. It would require that the companies notify a potential client of their for-profit status.

“Far too many homeowners have paid up-front fees to bad actors who promised loan modifications but never delivered,” US Treasury Department secretary Timothy Geithner said. “I commend the FTC for proposing a strong set of safeguards to protect consumers from these predatory practices.”

Several states already have similar laws in place, forbidding the upfront fees. Governor Arnold Schwarzenegger signed Senate Bill 94 in October 2009, which banned the fees.

In a story in the November issue ^[2] of HousingWire, a spokesman for the California attorney general’s office said that complaints of modification fraud increased with the same velocity as foreclosures. In 2007, consumers registered 27 complaints for the year, a number that grew to 163 in 2008. In September 2009 alone, the office heard 158 complaints, totaling nearly 2,000 for the year.

In the story, an FTC spokesman warned borrowers against the fraudulent practice.

“People should avoid any company or individual that requires a fee in advance, guarantees to stop a foreclosure or modify a loan, or advises the homeowner to stop paying the mortgage company,” the spokesman said.

As the first step in the rule-making process, the FTC sought comment on the practices of the for-profit mortgage relief companies in June 2009. A month later, the FTC launched Operation Loan Lies ^[3], a coordinated national law enforcement effort to hunt down mortgage modification scams.

The new proposed rule has a 45-day public comment period that ends March 29, 2010.

The case can be viewed by pulling from Judge Erithe A. Smith of the U.S. Bankruptcy Court for the Central District of California according to Law360.

If you suspect that your loan has been mishandled you should seek immediate action by calling our office at 713-595-8200.

- The Bank Slayer

Recently we helped homeowners with legitimate hardships due to medical conditions negotiate a settlement with Midland Mortgage that resulted in the following:

• Avoided foreclosure
• 11 months without having to make a payment
• Re-amortize the loan to roll in past due taxes
• Reduction in rate from 8.75% to 5.5 fixed

Home owners are so exasperated by the entire process that many times they are on the verge of giving up and letting the house go rather than battle with these knuckleheads.   Read on and if these examples give you the déjà vue then give us a call to find out how to get your situation under control.

-          The Bank Slayer

How Chase Bank Has Left Homeowners in Limbo

By Paul Kiel, ProPublica, February 15, 2010

On the Saturday before Thanksgiving, Lesa Herron of Santa Rosa, Calif., opened a letter from Chase Home Finance (PDF). She’d been denied a permanent modification under the federal government’s loan-mod program, Chase said, because “Your hardship is not of a permanent nature.” No other reason was given.

For Herron, that was hard to understand. She was working two jobs and her mortgage payment still amounted to more than half of her income. She’d fallen two payments behind. If her money troubles were only temporary, it was news to her.

We at ProPublica reported last month that mortgage servicers are often not following the Treasury Department’s rules for the program and provided three examples. One involved another homeowner who, like Herron, had been denied a modification because his hardship was not “permanent.”

Since that story, we have found several other similar cases: homeowners who may well be eligible for the program but who were denied because their troubles were not deemed “permanent.”

The cases ProPublica found all occurred before Treasury explicitly barred such denials in December. Despite the change in guidelines, however, those homeowners are still in limbo. Some face the possibility of foreclosure.

Through interviews with housing counselors and homeowners, we found six cases in which homeowners were denied because the hardship was found not to be “permanent.” All were in November. All were denied by Chase Home Finance, JPMorgan Chase’s mortgage servicing arm.

Chase seems to be alone among the largest servicers in having used that reason for denial. It’s unclear just what criteria Chase used to judge a hardship temporary.

Housing counselors told us that homeowners denied a modification for that reason should reapply. The program does not allow homeowners to appeal denials, and housing advocates have often criticized the program for not providing an effective way to challenge servicers’ determinations.

Christine Holevas, a spokeswoman for Chase, said that the company “adapts as quickly as possible” to Treasury’s guidelines. When asked, she did not say whether Chase would review the applications of homeowners who’d been denied because their hardships were considered temporary.

As we reported last month, the largest servicers have lagged in approving homeowners for modifications. Together, those servicers account for more than 60 percent of the 3.4 million mortgages eligible for the program, but very few homeowners have been approved for lasting modifications. About 425,000 Chase customers are eligible for loan mods,according to the Treasury Department. Only a little more than 7,000 have received permanent modifications.

The Treasury Department has laid out extensive guidelines for the $75 billion program in an attempt to standardize servicers’ evaluations of applicants. When a servicer joins the program, it signs a contract that says it will abide by those guidelines. In return, the servicers receive incentive payments from the government for each modified mortgage.

To receive a modification under the program, homeowners must demonstrate that they can’t afford their mortgage payments. But Treasury’s guidelines, first issued last April and updated repeatedly since, never mentioned testing the permanence of a homeowner’s difficulties when evaluating an application. Last December, a new guideline explicitly prohibited servicers from distinguishing “between short-term and long-term hardships.”

A Treasury spokeswoman said that since the program’s launch, servicers had developed “varying interpretations of the guidelines” and that Chase’s use of the “temporary hardship” denial before the guideline update was “reasonably consistent” with the program’s rules. She said that homeowners who’d been denied for that reason can contact a hotline staffed with housing counselors for help.

It’s impossible to say how many homeowners were denied for that reason. Servicers were not required to systematically collect and report the reason for denials before December. The reporting system includes only 14 possible reasons for denial; having only a temporary hardship is not one of them. Holevas did not respond to a question about the number of denials.

Jennifer Murphy, director of servicer relations at the nonprofit Center for New York City Neighborhoods, said that she had often seen homeowners rejected for modifications because their hardships were deemed “not permanent”—both before and after the launch of the federal modification program last year. As a result, she said, she advises homeowners to state that their hardships are permanent when they apply.

ProPublica could not find an example of any of the other top three largest servicers using the same denial. Spokespeople for Wells Fargo and Citigroup’s servicing arm said they do not evaluate the duration of the hardship for the purposes of the program. A spokesperson for Bank of America gave a more general reply and said the bank follows the program’s guidelines when evaluating homeowners.

Homeowners must meet certain basic qualifications to be eligible for a modification under the program: the home must be the primary residence and the homeowner must be able to show she can’t afford the mortgage payments. If those hurdles are cleared, the servicer is supposed to run a secret formula developed by the Treasury Department to determine whether the investor would make more money modifying the loan or not. The program lowers the mortgage payments to 31 percent of the homeowner’s monthly income. If modification is likely to be more profitable, the servicer is obligated to offer the homeowner a modification.

Chase’s criteria for a “hardship … of a permanent nature,” meanwhile, aren’t so easily explicable. The denial seems to have been applied in a range of cases. Some homeowners had been current on their payments when they applied for a modification, some were months behind. Some had been denied even a trial modification, while some had been denied after making trial payments for over half a year. The program is supposed to feature a three-month trial period before modifications are made permanent (as we’ve reported, trials frequently stretch much longer).

In the example we reported on last month, Chase told a mortgage broker named Nathan Reynolds that he’d been denied a modification because Reynolds had expressed optimism that the administration’s policies might rescue the housing market and thus boost his income. He told ProPublica that he’d likely declare bankruptcy if he didn’t receive a modification.

Yves Andre Vital, a housing counselor with Brooklyn Housing & Family Services, told ProPublica that Chase had denied one of his clients on the rationale that unemployment was only a temporary hardship.

In Lesa Herron’s case, she says a Chase employee told her she’d been denied because her gross income had not decreased since she refinanced into her loan in 2006. Herron works as an X-ray technician at a state-run center for people with developmental disabilities, but has supplemented her income by delivering pizza three nights a week for the past nine years.

Since last fall, she’d struggled to keep current on her loan, which carries a 9.5 percent interest rate and amounted to more than half of her income. But when she couldn’t cover the property tax, she fell two months behind. She was accepted to the federal program last May and was able to make the trial payments, because they’d been cut almost in half, from $3,350 to about $1,778.

Herron made six of those monthly payments before she received the denial letter for a permanent modification last November. She didn’t know what to do next. “I stopped paying my mortgage so that my family and I could get the money together to move when the bank made their next move.” She says she might try reapplying now that she knows her denial is against the federal program’s guidelines.

Paul Kiel is a reporter for ProPublica.

Thanks to Chase-sucks.com for this info.

1. “How did my neighbor get into HAMP (and/or get a loan modification) but I can’t?
2. “Do I have to be delinquent to get a workout plan?”

The best answers typically are:

1. The secret Black Box recipe may not mix well with your situation (read more here on this) because your loan may be very different from your neighbor. ex. FHA vs Conventional, Mortgage Insurance vs none, Freddie vs Fannie, 80/20 vs 90/10, etc.
2. You don’t have to be delinquent but the mortgage companies encourage it. (we have this in writing and in audio)

Add to it that most Mortgage Servicers (the ones collecting your payment):

• give borrowers poor advice based upon the banks own lack of understanding as to what is the best components of HAMP and HAFA in which to place your file;
• are motivated to foreclose as they have bought your loan at a deep discount and now want to flip the home for a profit;
• know that they can keep you in an endless loop of faxing and re-faxing while enticing you to send them some more of you hard earned dollars.

Finally, even the Treasury department is coming to the conclusion that the magic of HAMP is failing to perform as desired.

- The Bank Slayer

From HousingWire

Seth Wheeler, senior adviser to the US Treasury Department, said that one of the main goals of the Obama Administration is to fix the mortgage market in the United States, although federally subsidized modifications may not be appropriate for many borrowers.

Speaking at the American Securitization Forum (ASF) 2010 conference in Washington DC, Wheeler said the focus of the Administration is shifting somewhat away from modifications, as getting borrowers into the Home Affordable Modification Program (HAMP) is not always the best solution.

“Short sales, deeds in lieu are other ways to prevent foreclosures to help achieve [housing] stability,” he said. “Modifications are only for a certain subset of distressed homeowners.”

The Administration’s foreclosure alternative program – the Home Affordable Foreclosure Alternatives program,  or HAFA – will provide incentives to servicers and borrowers that pursue short sales rather than foreclosure. As HousingWire magazine reports ^[1], critics of HAFA say it will dull short sale experts’ competitive edge while other sources warn homeowners will still see short sales as the loss of homeownership.

“They can’t keep their home, but they can avoid foreclosure,” explained Colleen Hernandez, CEO of the Homeownership Preservation Foundation (HPF) – a nonprofit that partners with local governments, borrowers and lenders to facilitate foreclosure alternatives and promote homeownership.

“We are seeing middle class unemployed,” Hernandez said, adding the emerging class of struggling homeowners are unused to financial hardship. “They are slow to apply for benefits, slow to pick up a job that pays less, slow to take up the new world order.” HPF’s services help these borrowers get their arms around total finances as this class tends to be highly indebted with not only credit cards, but also outstanding student loans and car payments. “We help them  prioritize” the wind-down of their obligations, Hernandez added.

“HAMP can not be seen as the only solution,” said Doug Potolsky, a senior vice president at Chase Home Finance. “Chase has aggressive programs that deal with loans that fail HAMP.” Clearly, he said, other solutions are necessary as, in his department, HAMP is not particularly successful. Nearly one-third of Chase HAMP trial modifications result in no repayment, and only 20% ever reach permanent modification status, Potolsky said. “HAMP is not perfect, but improving. I think as a servicer we have to work on building our own [modification] program.” In terms of trying to follow the administrations directive to fix mortgage markets, Potolsky added that option ARM mortgages are particularly challenging to modify.

HAMP servicers completed a total 66,465 permanent modifications through December, according to the latest Treasury report ^[2].

Other panelists at ASF this week feel a heavy reliance on HAMP could even result in a second housing dip. The warning comes after a special inspector on the Treasury’s asset-relief efforts recently warned of a government-induced second housing bubble ^[3]. Another challenge facing the administration, according to ASF director Tom Deutsch, is the 30% of US borrowers that are underwater and facing strategic defaults ^[4]. And this is perhaps the biggest challenge facing the market.

Laurie Goodman, a managing director of Amherst Securities – and a vocal critic of HAMP for its failure to address negative equity ^[5] – responded to Deutsch: “If you have negative equity, you are very, very likely to default.” Goodman added: “Negative equity is the single most driver of defaults.”

Negative equity may be just one of the predictors of borrower mentality leading to strategic default ^[6], an issue HousingWire studies in-depth in the February magazine issue ^[7].

Nancy Mueller Handal, managing director of structured fiance at MetLife, also said at ASF that solving the issue of shadow inventory – homes at danger of default, which Goodman’s team recently estimated to range around 7m units ^[8] – will require a viable non-agency refinancing program in order to prevent the home again reaching default status in two to five years. Under this program, the private market for the mortgage-backed securities (MBS) could re-open, providing need liquidity into the market.

Written by Jacob Gaffney.  Diana Golobay contributed to this report.

Mind the P&L, as in Payoffs and Liens

Understanding your seller’s complete financial picture has long been a best practice of top producing REALTORS but that task has become more important and more complicated.  It’s not just declining home values and hard financial times that have forced many homeowners into positions where they owe considerably more than their home is worth.  Many homeowners thought they were improving their financial health with a loan modification only to find they are further underwater than when they started.

Has your seller modified their loan, taken a HomeSaver Advance or participated in HAMP?  If so, there are likely balances owed that are not reflected on the mortgage statement or payoff because these modifications likely created special liens.  These special liens require additional research to determine what is owed and to whom.  These situations as well as negative escrows are common and can quickly change a retail sale into a short sale.  Most mortgage companies are willing to accept a short payoff but the process can be time consuming and mentally taxing for both the seller and buyer.  REALTORS should approach these short sale situations with extreme caution as completing a short sale involves additional risk for the REALTOR and in most cases a lawyer may be required to protect both the seller and the REALTOR.

In a short sale situation, the mortgage company may try to keep your seller on the hook for the shortfall.  If your seller is not prepared for this they may attempt to hold their REALTOR accountable in a breach of fiduciary responsibility claim.  Complete debt forgiveness should always be the objective in a short sale.  The IRS has ruled that debt forgiveness on a homestead does not have to be treated as income even if the mortgage company issues the homeowner a 1099, this has been the case since 2007.

Additional common stumbling blocks are credit card judgments, child support deficiencies, delinquent property taxes, 3^rd part liens, HOAs, IRS liens, probate and divorce decrees can all prevent the sale if the seller doesn’t have enough cash to bring to the closing table.  Many of these issues can be set aside or negotiated down with the proper techniques and legal assistance.

Resolving these issues well in advance of taking your deal to title is the only way to ensure your deal closes.  When your retail deal becomes a short sale, find a local expert who not only has experience in negotiating with mortgage companies and other creditors but one who will seek to protect both you and your seller from future legal liabilities.

- The Bank Slayer

Flaws plague foreclosure relief program

Millions of Americans who are struggling to save their homes from foreclosure are trapped in a labyrinth of disappointment and misinformation created by the very institutions they’ve been told are trying to help them.

In many cases, lenders are moving to foreclose even after homeowners get approved for loan modification, housing counselors and attorneys say.    Homeowners face numerous hurdles trying to get their mortgage modified. In some cases, applications are rejected with little or no explanation. It’s impossible to independently verify if a homeowner qualifies because the Treasury has not disclosed the eligibility formula used by lenders — a complex set of calculations that housing counselors and consumer attorneys have dubbed “the black box.” Housing attorneys report that some lenders are ignoring the program’s guidelines altogether and moving to foreclose without properly reviewing mortgages for possible modification.

The HAMP guidelines call on lenders to try to modify every mortgage before moving to foreclosure. But that’s not what’s happening, according to a survey of more than 100 housing attorneys by the National Association of Consumer Advocates.   But “ninety-five percent (of the attorneys surveyed) said that a (mortgage) servicer had attempted to proceed with a foreclosure sale without a proper HAMP review,” said Ellen Taverna, a NACA associate who conducted the survey.

Under HAMP guidelines, lenders can deny a loan modification if the “net present value” of the new loan is less than the return they would get from not offering a new loan and going through with foreclosure instead.  In other words, the official guidelines allow mortgage servicers to base their decision entirely on whether the outcome is in the best interest of the lender or investor, not the homeowner.

If you are someone you knows is struggling with a loan modification or short sale, contact our office for FREE ADVICE to see what options exit for your particular situation.

- The Bank Slayer

Full Article Below…….

Flaws plague foreclosure relief program

Latest effort to save homes having only limited impact

By John W. Schoen

Senior producer

updated 1:00 p.m. CT, Tues., Jan. 26, 2010

Millions of Americans who are struggling to save their homes from foreclosure are trapped in a labyrinth of disappointment and misinformation created by the very institutions they’ve been told are trying to help them.

Ten months into the government’s third program in two years to stop a record wave of foreclosures, homeowners, housing counselors, consumer advocates and attorneys working with borrowers report that the latest effort is falling far short of its goal. In many cases, lenders are moving to foreclose even after homeowners get approved for loan modification, housing counselors and attorneys say.

The problem, they say, goes beyond the paperwork snafus and staffing shortages at lenders and mortgage servicers that have created massive bottlenecks for the millions at risk of losing their homes. Those have plagued the government’s foreclosure relief efforts since the first government-industry joint program, the Hope Now Alliance, was launched in October 2007.

Homeowners face numerous hurdles trying to get their mortgage modified. In some cases, applications are rejected with little or no explanation. It’s impossible to independently verify if a homeowner qualifies because the Treasury has not disclosed the eligibility formula used by lenders — a complex set of calculations that housing counselors and consumer attorneys have dubbed “the black box.” Housing attorneys report that some lenders are ignoring the program’s guidelines altogether and moving to foreclose without properly reviewing mortgages for possible modification.

“It’s been a stubborn challenge,” said a Treasury official, who agreed to an interview but requested anonymity. “But this is something that’s never been done before.”

Guidelines ignored
Many of the urgent problems with the government’s $75 billion Home Affordable Modification Program, or HAMP, are systemic. They can be traced to its basic guidelines for lenders and mortgage servicers — the companies tasked with collecting payments from homeowners and forwarding them to the investors holding a homeowner’s mortgage.

Launched last March as part of the Making Home Affordable initiative, HAMP was the Obama administration’s flagship program to halt a wave of foreclosures that two previous government efforts — the Hope Now Alliance and Hope for Homeowners — had failed to slow. In return for signing on to the program, lenders and mortgage servicers who agree to follow standard loan modification guidelines are paid a taxpayer-funded bounty of up to $4,000 for each loan they modify. Homeowners begin with a “trial” modification that is supposed to be made permanent if they keep up with payments for six months.

The HAMP guidelines call on lenders to try to modify every mortgage before moving to foreclosure. But that’s not what’s happening, according to a survey of more than 100 housing attorneys by the National Association of Consumer Advocates.

“Ninety-five percent (of the attorneys surveyed) said that a (mortgage) servicer had attempted to proceed with a foreclosure sale without a proper HAMP review,” said Ellen Taverna, a NACA associate who conducted the survey. Nearly half the housing attorneys said they have represented 10 or more households who had faced a foreclosure without a proper loan review; 14 percent said they have represented 50 or more households in that situation.

So far, the HAMP program hasn’t slowed a record pace of foreclosures. Some 2.8 million households were threatened with foreclosure last year, according to RealtyTrac, a Web site that tracks foreclosure filing nationwide. The company estimates the figure could rise to 3.5 million this year as payments reset on a wave of “pay option” adjustable-rate mortgages, which came with an especially nasty feature called “negative amortization.” Simply put, these homeowners face the prospect of a rising mortgage balance – leaving them owing more than they originally borrowed.

Frustrated by the lack of progress with loan modifications, some homeowners are giving up and choosing “strategic default” — simply walking away from their homes. Those defaults, and the ongoing wave of foreclosures, will continue to weigh on the housing market, holding back the nascent economic recovery.

Saving a home from foreclosure can be as simple as rewriting a costly, high-rate subprime loan to prevailing mortgage market rates. If that doesn’t bring the payment to within roughly 31 percent of a homeowners’ monthly income, HAMP guidelines require mortgage servicers to follow a step-by-step process to cut mortgage payments further. First, they can write down the interest rate to as low as 2 percent and then stretch the term of the loan to 40 years. If that doesn’t work, lenders can cut the amount of principal owed.

But cutting principal is entirely voluntary, and most lenders aren’t doing so, housing counselors and attorneys say.

“I don’t think it’s common at all,” said Helene Reynaud, vice president of national grants for the National Foundation for Credit Counseling. “When we ask our counselors, they never seem to see them. Or very, very rarely.”

‘More confused than ever’
Even if a homeowner gets a “trial” modification – and makes each new payment on time – they can still lose their home.

“The foreclosure and loan modification proceed on two separate tracks,” said Diane Thompson, an attorney with the National Consumer Law Center, who recently wrote a report on financial incentives that often encourage mortgage services to foreclose. “If you allow the foreclosure process to continue you’re going to end up with (foreclosure) sales because there’s not good communication between those two divisions in servicers.”

That’s what happened to Courtney Scott, a retired nurse living in an Atlanta suburb, who has spent the last two years trying to get Bank of America to modify her loan.

A week before Christmas, she got a letter saying that her mortgage was going to foreclosure, even though the bank hadn’t reviewed her application for a loan modification. Desperate to save her home, along with her substantial down payment and the equity she’s accumulated by making repairs, Scott says, she spent several hours on the phone trying to get through to bank representatives. When she finally reached them they were unable to find her application.

They told her that she would have resubmit it, which she did.

So she was thrilled when the good news arrived via e-mail Jan. 4.

“Your loan modification has been approved,” the e-mail said, asserting that a full package of documents was in the mail and that a “workout negotiator” would soon be in touch by phone.

“This will be a great end to what has been an unnecessarily drawn-out story,” she told msnbc.com.

But Scott’s joy was short-lived.

On Jan. 12, she got a call from a bank representative who told her that she didn’t qualify for a new loan after all. A follow-up email confirmed the bad news.

“I am more confused than ever,” said Scott.

(A Bank of America spokeswoman declined to comment, citing privacy laws, but said she would look into Scott’s case.)

The communications breakdown is more likely when foreclosures are handled by outside attorneys hired by a loan servicer, say housing counselors. If the lender or servicer doesn’t take the extra steps required to stop the clock on a foreclosure proceeding, it can easily overtake the process of modifying a loan, they say.

“The (foreclosure) process carries on a momentum of its own,” said Thompson. “Some of it happens more or less automatically once you start scheduling things. Once a sale is scheduled, someone has to actively intervene to stop the sale, and the current guidance from Treasury allows a (foreclosure) sale to be scheduled even if someone is making current payments on their trial modification.”

The Treasury official said that guideline is under review.

“We certainly hear the issue, and want to make sure the (HAMP) guideline on foreclosure prevents anyone’s home from going to sale,” the Treasury official said. “We are looking at guidance to make sure the communication is clear.”

The ‘Black Box’
Homeowners who have been turned down for a modified mortgage report that servicers often don’t spell out why they deny an application, say housing advocates. With no formal appeals process, HAMP makes it extremely difficult for homeowners and their counselors to figure out whether their applications were properly reviewed.

Attempts to contact lenders and servicers often go unheeded, according to Brenda Lopez, chief operating officer at SurePath Financial Solutions, a HUD-approved credit counseling service in Camarillo, Calif.

“They say, ‘I don’t have access to that information,’ and then they transfer you, and then they’ll transfer you again,” she said. “Then they’ll tell you, ‘The case is already closed, you cannot reach the negotiator and I don’t have that expertise to tell you why it got denied. It got denied.’ And that’s it.”

Late last year, the government “issued instructions for servicers to specify in detail” why a borrower was rejected for the program and to consider other loan mitigation options, the Treasury official said.

Worse, say housing counselors and attorneys, there is no way to independently verify whether a lender or servicer has followed the government’s HAMP guidelines. That’s because the Treasury hasn’t disclosed the “black box” formula used to decide which loans will get modified.

Under HAMP guidelines, lenders can deny a loan modification if the “net present value” of the new loan is less than the return they would get from not offering a new loan and going through with foreclosure instead.  In other words, the official guidelines allow mortgage servicers to base their decision entirely on whether the outcome is in the best interest of the lender or investor, not the homeowner.

Because the Treasury has kept the formula a secret, homeowners who have been rejected for modification can’t check the lender’s math to correct possible mistakes about the borrower’s income, home value, credit score or other critical pieces of data.

“As long as there is secrecy around the formula, and it’s not well understood how it functions, that’s a big issue,” said Reynaud.

In response to requests from housing counselors and attorneys, the Treasury plans to provide more information on the formula by the end of the first quarter, the Treasury official told msnbc.com.

That secret formula also has slowed loan modification negotiations with homeowners because many lenders are apparently unwilling to deviate from the formula, even if the investor holding the mortgage is willing to be more flexible, according to housing counselors.

“Many of the investors are anxious to do a workout that goes beyond the standardized approach that the servicers have scripted,” said David Berenbaum, chief program officer at the National Community Reinvestment Coalition, which oversees a national network of housing counselors. “The servicers blow a gasket when (our counselors) call the investors (directly.) They get very upset with us. But ultimately there’s nothing they can do.”

That kind of end run is exactly what happened last week in Scott’s case. While she continues to try to appeal her loan modification rejection with her bank, she said she was surprised by a call from someone representing the investor holding her loan, who said they were offering another chance to modify her mortgage with a slightly lower payment. (Scott is working with a local HUD office to follow up on the offer.)

The number of homeowners who have been helped by the program has been dismally small.

When first announced last year, Treasury officials said they hoped to stop as many as 4 million foreclosures. But HAMP guidelines initially were incomplete, and mortgage servicers complained they weren’t given enough guidance on how they should be applied.

For their part, lenders and loan servicers express their own frustrations with the HAMP program. They note that some homeowners don’t respond to their outreach efforts, fail to properly fill out applications and often submit incomplete paperwork.

They also complain that the HAMP program has been plagued with numerous revisions and delays in issuing technical details attached to broad guidelines. Since April 2009, new program requirements were released nine times, and more than 90 clarifications were issued for new or revised forms, reporting changes and policies, according to the Mortgage Bankers Association. The changes meant mortgage servicers had to alter their procedures and retrain employees, which added to delays.

In July, as the pace of foreclosures continued to rise, major lenders were summoned to a Washington meeting with Treasury officials. There, they committed to modify 500,000 mortgages by Nov. 1.

By the end of December just 66,000 homeowners had been issued permanent loan modifications, with temporary modifications in place for about 850,000 more (who still faced the prospect of having it reversed by the lender.)

The Treasury official said the major focus now is on converting those temporary modifications to permanent loans.

Some banks and lenders have done better than others, according to a recent report by ProPublica, an independent, non-profit newsroom that produces investigative journalism.

“The big names are among the worst-performing servicers,” according to ProPublica. “Bank of America, JPMorgan Chase, CitiMortgage and Wells Fargo together account for more than 60 percent of the 3.4 million mortgages eligible for the program. All four have converted a small percentage of the trials begun three or more months ago into permanent modifications. The highest is Wells Fargo, with only 13 percent.”

Some housing counselors think the Treasury needs to get tougher with lenders and loan servicers who don’t follow the guidelines that call for a thorough loan review before moving to foreclosure.

“I don’t think that Treasury has reached the point where they can even enforce their own directives, either because they don’t have the resources or the tools to punish the servicers,“ said Reynaud.

Others say the lack of enforcement is the result of problems with the program itself, starting with the contracts lenders and servicers signed with the Treasury to participate in HAMP.

“In most circumstances, all (Treasury) can do is ban servicers from the program,” said Thompson. “And that’s not a very effective way of getting them to make modifications if they’re not already making them.”

Treasury officials say they expect to make some relatively minor changes this week to HAMP guidelines. But a growing number of stakeholders think broader changes are needed.

Lenders note that, since foreclosures began surging more than two years ago, the primary cause has shifted from rate adjustments to job loss, which leaves homeowners unable to manage even a lower monthly payment.

The MBA wants to see the HAMP program modified to include standard guidelines for loan forbearance, in which lenders temporarily suspend payments until the borrower can find a new job. It also wants to HAMP guidelines expanded to include interest-only loans, which the trade groups says could help more people get an affordable loan.

Others suggest it’s time to revisit a proposal, fiercely opposed by the lending industry, to allow bankruptcy judges to modify mortgages from the bench. (Primary mortgages are currently the only form of debt excluded from so called “judicial modification.”) Housing advocates say changing the bankruptcy law would dramatically speed the pace of loan modifications and save millions of homes from foreclosure.

“There are many people in the industry who would be glad to see HAMP go or who don’t believe that these modifications can work,” said Thompson. “Most people who are representing consumers think that there are there are significant flaws in the program’s design, but that some kind of government-sponsored modification program is essential to get us out of the foreclosure crisis.”

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