If large banks like Bank of America routinely foreclose on the wrong house are we sure mortgage payment are going to the correct place?

Is the bank going to indemnify the homeowner from Uncle Sam’s claims when the mortgage is paid off in a short sale or even a simple refi?

– The Bank Slayer

U.S. tax dollars used by Federal Reserve to pay foreign partners of AIG

The New York Fed, led then by Timothy F. Geithner, who is now the Treasury Secretary, “refused to use its considerable leverage,” according to Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, wrote in a report released some time ago.

Just two days before the New York Fed paid A.I.G.’s partners 100 cents on the dollar to tear up their contracts with the insurance giant, one bank volunteered to take a modest haircut — but it never got the chance.

Mary Williams Walsh at the NY Times says that the Federal Reserve Bank of New York gave up much of its power in high-pressure negotiations with the American International Group’s trading partners last year.

Neil Garfied has a great commentary on this piece.

In her article you have the crux of the problem for the investors in mortgage backed securities, for the foreclosing servicers and for aptly named pretender lenders.

What did the taxpayer actually pay for and what did they get for it?

Consider that if all went to pay off credit default swaps at 100 cents on the dollar then are those obligations to be considered paid or still outstanding, due and owing?   And if they are still due and owing, to whom?

Whether a home goes to sale at a foreclosure or not we are left with the same problem.  To whom is the money owed?

If the Federal Reserve paid off the credit default swaps (READ: insurance) then doesn’t the Federal Reserve has some claim to the underlying asset to which the insurance was applied?

It seem quite clear that one of two scenarios has taken place.

My mortgage which is current is “owned” by the Federal Reserve

When my house which sold at a foreclosure auction bank to the bank should be delivered to the Federal Reserve.

Either way the Fed seems to have a clear claim to the money or the collateral.

http://livinglies.wordpress.com/2009/11/17/audit-faults-new-york-fed-in-a-i-g-bailout/

So many friendly Texas folks, while understanding yesterday’s post about the new short sale program understood there were some “gotchas”, but they still wanted to know how to make it work.  Fair enough…

Here’s what you need to do:  Start with the premise that the bank is going to try and “steal” your $3,ooo. You must understand this fact first.

Ok, now that you understand the bank is a thief, what’s next?  Second, understand that whatever outstanding bills (such as HOA, water softener, A/C or Heater liens, roof, etc.) are outstanding will need to be negotiated down, paid off or released for you to keep your $3K.

Why?  Because as we mentioned yesterday the bank is going to apply YOUR MONEY to your bills.   I know it doesn’t seem fair but neither was the crappy loan terms, interest rate and/or yield spread that might have been pulled on you when you took the loan.

Third, realize that if you have extra cash laying around in your bank accounts that the bank MAY give you the $3,000 but they will likely ask you to sign a promissory note for some amount of the deficiency left after the house closes. Ex.  Sale price = $100,000.  Net to bank after closing costs = $90,000.   But you owe $120,000.  This leaves a $30,000 deficiency.

If the bank believes you have money they will likely ask you to agree to pay some of this back.

Bottom Line: You need to skillfully negotiate your deal to maximize your chances of putting as much of the $3,000 in your pocket as possible.   When all else fails and if you have reason, you might be able to sue your old mortgage broker or lender to get them to cough up some money to get you out of the mess.

If you want a FREE checklist of the 15 things your bank should have done at closing, to see what angles of attack might be aimed at the bank, simply email our office and we’ll send it to you.

– The Bank Slayer

Bank of America, clearly our Nation’s leading “uplifting promise to do something press release” mortgage banker, immediately stepped forward to claim,

“The new program will give us a degree of efficiency that we have not had in the past,” said Matt Vernon, Bank of America’s executive in charge of short sales and foreclosed properties.

Why? Well as USA Today is reporting.

Along with the financial incentives, the new government program makes another key change. Mortgage companies will have to set their minimum bid before the house is listed for sale.  If the offer is above that, the lender must accept it.

That’s a big change from current practice. Lenders generally don’t calculate how much money they are willing to accept on a short sale until they have an offer in hand, causing long delays before the sale is approved.”

Hold the presses!!!! You mean the bank is going to calculate an amount they are willing to take BEFORE considering a short sale!   This is absolutely amazing.  I bet not a single bank today has any idea of what they will take for an offer.   I heard they simply throw darts at a board with a bunch of dollar amounts.

WAKE UP!!    Of course, they already have a number they are willing to take! Give me a break.

Oh and by the way… loans currently under the Freddie and Fannie umbrella aren’t eligible.

Let me tell you very simply how this is going to work:

1. The bank has a number that is very close to payoff or full market value whichever is higher.   This will be the target for the homeowner to try and reach for a “pre-approved” short sale bid.
2. The $3K, the homeowner is supposed to receive to help move, will be used to pay for outstanding items like property taxes, HOA bills, real estate commissions, closings cost, etc.  How do we know this?  Because the FHA through HUD already gives homeowners $1,500 to move.  Guess what?  It almost always goes in its entirety to pay for seller related selling costs.
3. There will be the standard long wait time to get approved for a short sale if you don’t reach the “pre-approved bid amount”.

Bottom Line:   This program will do nothing to speed up the process except for buyers BUT it will give a little wiggle room at the end of the sale to cover a seller’s outstanding past due bill.  Hey, something is better than nothing.

-          The Bank Slayer

Below is the USA Today article….

Short-sale program aims to help ‘underwater’ homeowners

WASHINGTON — The government launched an effort on Monday to speed up the time-consuming, often-frustrating process of selling your home if you owe more than it’s worth.

The Obama administration will give $3,000 for moving expenses to homeowners who complete such a sale — known as a short sale — or agree to turn over the deed of the property to the lender. It’s designed for homeowners who are in financial trouble but don’t qualify for the administration’s $75 billion mortgage modification program.

Owners will still lose their homes, but a short sale or deed in lieu of foreclosure doesn’t hurt a borrower’s credit score for as much time as a foreclosure. For lenders, a home usually fetches more money in a short sale than a foreclosure. And the bank avoids expensive legal bills, cleanup fees and maintenance costs that follow a foreclosure.

“It’s very traumatic and embarrassing and frustrating to go through a foreclosure,” said Laurie Maggiano, policy director of the Treasury Department’s homeownership preservation office. With a short sale, she said, “your financial issues are your own problem and not neighborhood conversation.”

Falling home prices and lost jobs have forced many sellers into this position. For example, in Orange County, Calif., short sales made up about 26% of the market in March, compared with 17% a year earlier, according to data complied by Altera Real Estate, a local brokerage. In the Minneapolis-St. Paul metro area, about 12% of all deals since October were short sales, up from about 8% a year earlier, according to the Minneapolis Area Association of Realtors.

The expanded incentives will help accelerate short sales, said Mark Zandi, chief economist at Moody’s Analytics. He expects 350,000 homeowners nationwide to use the program through the end of 2012, more than double his earlier forecast.

A short sale appears to be the only way out for Brandee Chambers, 36, of Las Vegas. She got into trouble during the housing boom by taking out a risky loan against her home and using the money to buy two investment properties in Phoenix.

Along with the financial incentives, the new government program makes another key change. Mortgage companies will have to set their minimum bid before the house is listed for sale. If the offer is above that, the lender must accept it.

That’s a big change from current practice. Lenders generally don’t calculate how much money they are willing to accept on a short sale until they have an offer in hand, causing long delays before the sale is approved.

The new program “will give us a degree of efficiency that we have not had in the past,” said Matt Vernon, Bank of America‘s executive in charge of short sales and foreclosed properties.

Under the new process, buyers who submit an offer to purchase a home in a short sale should get a response within two weeks, as opposed to months. If that happens as planned, it would be a big improvement. Real estate agents across the country have complained that lenders are often difficult to reach, sometimes only communicating by e-mail and infrequently at that.

“You’re one of 400 properties on a screen,” said Dave Bauer, a real estate agent in Danville, Calif.

Some real estate agents who specialize in short sales are optimistic. “It could be the first government program that actually helps Las Vegas,” said Steve Hawks, a real estate agent there who specializes in short sales. Most borrowers in Las Vegas, he said, owe so much more on their mortgages than their properties are worth they can’t qualify for a loan modification.

The Treasury Department outlined the plan last November, but doubled the original $1,500 in relocation money after realizing that many homeowners need more cash to move out. That’s because landlords usually want large deposits from people whose credit records have gone sour after missing mortgage payments.

However, there are plenty of restrictions. To qualify, the home needs to be a borrower’s primary residence. Homeowners either have to be behind on their mortgages or on the verge of becoming delinquent.

Currently, the program is not available for mortgages owned or guaranteed by mortgage finance companiesFannie Mae and Freddie Mac, though the two government-controlled companies will soon follow suit, said the Treasury’s Maggiano.

Bottom line is more foreclosures are coming.  Hopefully some will be averted with short sales and modifications but homeowners and REALTORS have to act quickly before the loan is too far behind.  The foreclosure process in Texas is FAST!!!!

Stats from 2008, (in the Houston MLS) show that only 15% of all REALTORS listing short sales successfully closed them.

An 85% failure rate is not good.

Don’t waste another minute.

- The Bank Slayer

Declining Mortgage Performance in Q409 Means More Foreclosures Ahead: Feds

Posted By JON PRIOR

In Q409, the amount of mortgages falling behind by 90 or more days increased 21.1%, resulting in more foreclosures ahead, according to a study from the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS).

The OCC and the OTS report covers nearly 34m loans totaling $6trn in principal balances, representing 64% of all outstanding mortgages in the US. Overall mortgage performance declined for the seventh consecutive quarter, as 86.4% of the mortgages studied were current and performing at the end of Q409.

Banks initiated fewer new foreclosures in the quarter, swelling projections of the “shadow inventory” of homes waiting to hit the market. The actual number of that inventory remains in debate. Standard & Poor’s showed it could take three years for the market to clear ^[1] the overhang. Richard Powers, senior vice president of real estate sales at Altisource Portfolio Solutions said that number could double ^[2].

The US Treasury Department launched the Home Affordable Modification Program (HAMP) in March 2009 to give incentives to servicers for the modification of loans on the verge of foreclosure. Today, the Treasury mandated that servicers participating in the program halt foreclosure procedures ^[3] until a borrower has been considered for HAMP. In Q409, HAMP servicers initiated more than 250,000 new HAMP three-month trial plans and converted more than 21,000 trials into permanent modifications.

But echoing same sentiments from the Treasury, servicers reported that HAMP and even some private-market foreclosure programs are not for everyone ^[4], and not everyone can get help.

“In this regard, servicers reported that they expect new foreclosure actions to increase in the upcoming quarters as many of the mortgages that are seriously delinquent may eventually result in foreclosure as alternatives that prevent foreclosure are exhausted,” according to the report.

As far as regarding how you “get your principal reduction” in HAMP read on…

Remember folks, these changes to HAMP and HAFA and every other program rolled out require not only sign off at each of the various “banks” but also they are guidelines meant to encourage behavior.

You should drink eight glasses of water each day as well.  Do you follow that guideline?

Thus far we have seen no significant recourse for homeowners if the mortgage companies don’t obey these guidelines.   But let’s at least consider what they are proposing.

The new HAMP guidelines:

• “encourage principal write-downs”
• “are to be implemented in coming months”
• “requirement that servicers consider ‘principal relief’”
• “Borrowers faced with unemployment… will be able to have payments temporarily reduced to an affordable level for three to six months”
• “servicers must pursue early intervention”

Especially power is a REQUIREMENT to consider.  Tack on the MUST pursue early intervention.  i.e., MUST mail homeowners letting them know they need to take action or they will face foreclosure.    I’m sure we’re all encouraged about the “affordable” payments when you have no income due to loss of job.  I vote for $1 mortgage payments.

If you want to take down the bank, forcing them to offer you a significant loan modification or write-down in a short sale be prepared to fight and fight hard.  It is a winnable battle but suit up.

-          The Bank Slayer

Treasury Prepares Principal Reduction Initiative under HAMP

Posted By DIANA GOLOBAY On March 26, 2010 @ 8:00 am | 1 Comment

(Update 1: adds Treasury announcement.)

The US Treasury Department, as it continues to revamp the Home Affordable Modification Program (HAMP), announced today an initiative to encourage principal write-downs.

The principal reduction plan is one of the changes to HAMP, to be implemented in coming months.

The changes will encourage servicers to write-down a portion of mortgage debt as part of a HAMP modification, allow more borrowers to qualify for modification and help borrowers move into more affordable housing when modification is not possible, according to a fact sheet on the improvements provided to HousingWire.

Most notable among the new initiatives is the requirement that servicers consider “principal relief” including write-downs.

“This alternative modification approach will include incentive payments for each dollar of principal write-down by servicers and investors,” Treasury said in a statement today. “The principal reduction and the incentives will be earned by the borrower and lender based on a pay-for-success structure.”

The principal reduction initiative is geared toward borrowers with excessive negative equity.

The write-downs will apply only to borrowers with 115% or higher loan-to-value (LTV) ratios. Servicers will initially forbear some or all of the balance exceeding 100% of the home’s value, down to a 31% debt-to-income ratio. Then, the servicer will forgive the forborne amount in three equal installments over three years, contingent on the borrower’s ability to remain current on payments.

Borrowers faced with unemployment – therefore, a lack of income to calculate the debt-to-income ratio targeted under HAMP – will be able to have payments temporarily reduced to an affordable level for three to six months. Treasury is also clarifying borrower outreach and communication requirements, increasing incentives available to servicers and extending those incentives to borrowers with mortgages insured by the Federal Housing Administration (FHA).

The Treasury also announced adjustments to FHA programs that will provide more refinancing options to borrowers with negative equity due to large local declines in home prices. The new FHA loan should re-equify the borrower by reducing the amount owed on the original loan by at least 10% and resulting in a principal amount less than the home value. After refinance, the combined first mortgage and any secondary liens cannot surpass 115% of the current value of the home.

“This refinancing will help homeowners by setting monthly payments at affordable levels and decreasing the mortgage burden for families owing significantly more than their homes are worth,” Treasury said. “Keeping more responsible families in their homes should support the continued recovery of the housing market.”

For borrowers that cannot complete a modification, there’s the Home Affordable Foreclosure Alternatives (HAFA) program, which ends in a short sale. Treasury said today it will double relocation assistance payments to borrowers that elect HAFA, as well as increase incentives for servicers and lenders in order to increase participation in this program.

Laurie Maggiano, Director of Policy in the Office of Homeownership Preservation at the Treasury, indicated yesterday during a Webinar ^[1] hosted by HousingWire that a significant announcement around HAFA was in the works.

The Treasury yesterday announced sweeping improvements ^[2] to the way servicers actively solicit borrowers for participation in HAMP, even from the protection of bankruptcy. Beginning June 1st, servicers must pursue early intervention, pre-screening every borrower that misses two or more payments to determine eligibility for HAMP and soliciting those qualifying borrowers for HAMP participation.

The news of a HAMP principal reduction program comes after Bank of America (BAC ^[3]: 17.90 +0.90%) introduced this week ^[4] an earned principal forgiveness program in which a forborne amount of principal will gradually be forgiven over a five-year period.

Analyst commentary on the program suggests it bears adverse implications ^[5] for the payout of certain non-agency mortgage-backed securities (MBS). In particular, the program presents a “clear negative” for junior mezzanine and subordinate debt holders, as well as moral hazard risk as borrowers intentionally default to receive principal forgiveness.

Bottom Line:  Tough to buy a new house if you can’t sell your current home.

-       The Bank Slayer

Tax Credit Losing Momentum

By Kevin Chiu, Housing Predictor

First time home buyers are being credited $12.5 billion in government tax credits, according to the Treasury Department. But the federal tax credit with the expansion of the program to move-up home buyers is losing momentum, a Housing Predictor analysis shows.

A boom to first time home buyers and real estate agents amid the highest volume of foreclosures on record, the tax credit was expanded by the federal government in November to include move-up home buyers. But only a small percentage of move-up buyers have been able to take advantage of the $8,000 credit. The majority have had trouble selling their current homes.

A survey of 50 housing markets monitored by Housing Predictor indicates that the heavy volume of purchases triggered by the tax credit has slowed. The credit boosted home sales last summer and during the last part of 2009 only to fizzle, lacking the ability to sustain a real recovery in the majority of housing markets surveyed. Only eight markets of the 50 surveyed demonstrated on-going strengthening with more home sales. The tax credit expires April 30th.

High unemployment in the majority of the country is still hampering any real sort of recovery in housing. Despite low interest rates, which may rise later in 2010, home sales dropped in January and February. Home prices showed signs of stabilizing from government programs in some areas of the country, but the pent up back-log of foreclosures listed for sale and a shadow inventory of properties are pressuring home values in most markets.

The Obama administration has pumped more than $1.4-trillion into the housing market from buying mortgages with tax credits and programs to refinance homes at lower rates, but still hasn’t made a major move to remedy ailing markets. “You’ve got a really big problem that requires big guns and the tax credit is just not big enough,” said Robertson Williams of the Tax Policy Center in Washington, D.C.

Mortgage holders who owe more on their home than it is worth in today’s market are another problem. Under water home owners are helping to eliminate any real recovery in the housing market as more choose to walk away from their homes rather than keep paying the mortgage. Most homeowners have to sell their home before they can move and without equity they are at a loss to do so.

The National Association of Realtors lobbied for and got the tax credit extension from Congress, who asked them not to come back to request an extension for the program again.

A bill to force lenders to modify mortgages for homeowners at risk of foreclosure is bogged down in Congress as an average of 8,600 foreclosures a day are recorded across the nation.

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.

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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