No surprise, Bank of America\Countrywide gets the lowest marks for giving trial modifications.  But my office can confirm that all lenders have been slow to convert trial mods into permanent loan mods.  Principal reduction remains extremely rare on first mortgages even in California.

The interesting part of this article is the way in which  Michael Barr, the assistant Treasury secretary for financial institutions, glosses over the specific consequences that that lenders will face if they do not comply with the HAMP loan mod guidelines.  The reality is that there is no substantive consequence.  The government continues to treat the lending industry with kid gloves rather than endorse judicial loan modification through the bankruptcy courts.  There will not be a substantive consequence for the lending industry until borrowers are given a private cause of action to sue lenders who fail to comply with the HAMP guidelines or a borrower can gain leverage by threatening cram down through the bankruptcy courts. 

From http://www.bloomberg.com/apps/news?pid=20601087&sid=arxK7oZqHJLM&pos=5

By Dawn Kopecki and Jody Shenn

The U.S. Treasury Department will begin taking action against lenders that aren't doing enough to ease mortgage payments for troubled homeowners as part of the Obama administration's campaign to curb foreclosures.

Lenders face "consequences" that may include sanctions and monetary penalties if they fail to perform under the Home Affordable Modification Program, the Treasury said. The $75 billion program requires banks that took federal aid to help homeowners at "imminent risk" of default by lengthening repayment terms, lowering interest rates and making other changes to the mortgages to avert foreclosure.

"Now, it's up to the banks to do their part," Michael Barr, the assistant Treasury secretary for financial institutions, said on a conference call today with reporters.

The Treasury is also requiring some mortgage servicers to speed the decision process for changing loan terms and to submit regular status updates. Bank of America Corp. is among the worst performers in the program based upon a Treasury Department measure of trial modifications as of October. Morgan Stanley, Citigroup Inc. and JPMorgan Chase & Co. are among the best.

"We must now refocus our efforts on the conversion phase to ensure that borrowers and services know what their responsibilities are in converting trial modifications to permanent ones," Phyllis Caldwell, who runs the Treasury's Homownership Preservation Office, said in a statement.

Withholding Fees

The Obama administration, which set out in February to modify as many as 4 million loans, finds itself having to pressure lenders to convert more than 650,000 trial revisions made so far into permanent mortgage modifications. About 375,000 of those loans may convert into permanent repayment plans by the end of the year, the Treasury said.

Barr said the Treasury's contracts with servicers allow for the government to withhold payments, such as $1,000 in upfront fees for each completed modification, if the companies fail to convert the modifications.

"I don't want to get into details of the additional consequences, but we will not hesitate to use the full range of authorities that we have," he said. Asked at least three times what the penalties might include, Barr refused to answer, saying once "I really don't want to get into it at this time."

The administration requires banks that received federal aid from the Treasury's Troubled Asset Relief Program, as well as mortgage-finance companies Fannie Mae and Freddie Mac, to lower monthly payments for borrowers in need.

Confusion and Delays

Eligible loans under the program are at least 60 days past due or judged at risk of delinquency, in foreclosure or bankruptcy, and originated before 2009. The underlying property must be owner-occupied and conform to Fannie Mae and Freddie Mac loan limits, which can be as high as $729,750 in some areas. The data excludes Federal Housing Administration and Veterans Affairs loans. A borrower's mortgage payment must be 31 percent or more of gross monthly income.

Mortgage servicers and lenders have struggled to gather the necessary paperwork from borrowers and complained of confusion and delays in how the government sets rules for the programs, according to industry testimony before Congress this year.

"Overall, I am impressed with how much these servicers have accomplished operationally given the newness of the program and the need to design programs, set up systems and train people," said Scott Buchta, head of investment strategy at Guggenheim Securities LLC in Chicago. "Given the large amount of trial modifications that have been started over the past two months, we may not have a clear picture on the conversion success rate until early next year."

Swat Teams

Caldwell will be heading Treasury "swat teams" visiting the offices of the largest loan servicers this month. She and Barr said on the conference call that borrowers need to step up their efforts to make the Home Affordable program work as well.

About 37 percent of the 375,000 homeowners potentially eligible to convert to permanent modifications by yearend have submitted only a portion of the documents needed, while 20 percent haven't submitted any paperwork, according to Caldwell. Most borrowers in the program are "paying and paying on time" on their reworked bills, Barr said.

The Treasury plans to begin releasing data in December on how banks rank in making trial modifications permanent. The modification program was announced in February as a way to combat a surge in foreclosures that has pushed property values lower and curtailed economic growth. The program has been hampered partly by a rising unemployment rate that reached a 26- year high of 10.2 percent in October.

Unemployment, Foreclosures

The foreclosure rate as a result jumped to a record 4.47 percent in the third quarter from 3.3 percent at the end of last year, according to Mortgage Bankers Association data. Seriously delinquent loans, those at least 90 days late on payments, reached 8.85 percent from 6.3 percent at the end of 2008.

The Mortgage Bankers Association, the industry's largest trade group, has said foreclosures won't peak until unemployment rates crest, some time in the second half of next year.

Robert Davis, executive vice president of the American Bankers Association in Washington, said yesterday that unemployment is "the primary driver of defaults right now." He said he was "puzzled" by the stepped-up pressure.

Cash Incentive

One purpose of the trial period "is to protect the taxpayer by making sure these loan modifications will work before anything is paid out to the lender," Davis said. "Suddenly, for that to become a measure of bad performance when institutions are doing everything they can, is just baffling."

The administration's initiative provides a cash incentive of $1,000 to the mortgage servicer once a loan is converted from a trial to a permanent modification plus annual payments of $1,000 for as long as three years provided the loan remains in good standing.

Bank of America has started trial modifications on 14 percent of its eligible loans as of October, according to the Treasury. The Charlotte, North Carolina-based bank, the largest in the U.S. and the biggest mortgage servicer, has 990,628 eligible loans, a greater total than any other company on the Treasury's list. A spokesman for Bank of America, Dan Frahm, has said the eligibility data may be overstated.

"As many as one in three of those borrowers listed as eligible for the program will not actually qualify for HAMP because the home is vacant, the customer has a debt-to-income ratio below 31 percent or is unemployed," Frahm said in a Nov. 10 interview.

The following article captures the reality of what many homeowners in financial distress will face in trying to secure a loan modification.  Servicer incompetence is rampant.  The bottom line is that if you are wrongfully denied a loan mod, there is little you can do about it.  There is no right to sue and only the Treasury Department can punish the lenders.  So far they have taken no such action.

WASHINGTON (AP) - Towana Gooch, a single mom who lives with her 10-year old daughter, was on the verge of losing her town house in suburban Maryland after her mortgage lender kicked her out of a government loan modification program. The problem, she says she was notified, was a 7-cent error.

Later, the lender told her the tiny error wasn't actually the issue, that her low income disqualified her from the program. She called the bank trying to get to the bottom of it all, but she got no answers and feared there was nothing to head off foreclosure, scheduled Friday.

After an inquiry by The Associated Press, the bank, America's Servicing Company, a division of Wells Fargo & Co., finally returned her call this week to apologize for the 7-cent error and say the foreclosure sale had been put on hold for now.

Though her story is striking, Gooch is far from alone in her problems with the Obama administration's loan modification program, which provides federal subsidies to encourage lenders to renegotiate rather than foreclose on certain borrowers. Seven months in, many qualified applicants are being rejected, often through bank errors, with no avenue of appeal. Until this month, lenders didn't even have to tell them why.

"If the servicer messes up, even by accident, there is no meaningful way to complain, no real appeals process, no viable ombudsman to consider," said Kevin Stein, associate director of the California Reinvestment Coalition in San Francisco. "Most importantly, there are no consequences to the banks for failure to do what they have promised to do."

Meanwhile, foreclosures continue to rise with each month's report of new job layoffs and each new wave of adjustable-rate mortgages resetting to higher payments.

Foreclosure filings are on a pace to hit about 3.5 million this year, up from more than 2.3 million last year, according to a Thursday report by RealtyTrac, which compiles data for most U.S. counties.

Gooch, who lost her job as a recruiter earlier this year, said she had been thrilled last month when the bank notified her that her monthly payment would be cut in half, to $938. Gooch agreed to the payment and even logged on to the White House Web site to post a public comment personally thanking President Barack Obama.

"I was so confident in this that I didn't make a plan B or C," she said in a telephone interview from her town home in Upper Marlboro, Md.

But America's Serving Company later notified Gooch that she no longer qualified for the program because her first automatic withdrawal payment should have been $938.07, not simply $938.

Government officials can't say how many people have been turned down because of a typo, lost fax or an oversight by a poorly trained bank employee. But the Treasury Department acknowledges that far too many applicants have wrongly been rejected.

In August, the department told mortgage buyer Freddie Mac to begin auditing participating banks through a program called "second look."

Meg Reilly, a Treasury spokeswoman, said officials are still trying to determine the scope of lenders' noncompliance with the program. Freddie Mac is currently reviewing about 1,000 files per week, but there are no reliable figures yet on how many mistakes were caught, she said.

"In every reported case of eligible borrowers being denied modifications, we worked with the servicer to correct the problem," Reilly said.

As of last month, the government had provided some $1 million to banks in investor subsidies and incentive payments through its Home Affordable Modification Program, according to the Government Accountability Office. Obama initiated the $50 billion effort in March to encourage lenders to renegotiate rather than foreclose on borrowers who meet certain criteria, such as having mortgage payments that exceed 31 percent of their monthly gross income.

The program was slow to take off, but last week Treasury announced that half a million homeowners had enrolled in three-month trial loan modifications -- a target that was met a month ahead of schedule.

David Berenbaum, executive vice president of the National Community Reinvestment Coalition, said his organization is seeing an increasing number of bank mistakes as the program gets into full swing. He attributes the problem to a shortage of well-trained loan counselors at banks overwhelmed by applications.

The coalition, which has been working with Gooch to modify her loan, believes her income meets the guidelines under the program.

"We have to fight for the modifications or refinances in more than half the cases that we see," Berenbaum said.

The government has established a general foreclosure crisis hot line number that can take complaints, but housing counselors doubt its utility for sorting out complex mistakes. Treasury recently set up a special phone number to appeal urgent cases, but the number is available only to certain government-designated housing counselors.

Lenders have been directed by the government to set up their own appeals process. And by December, banks participating in the program will be required to report why certain homeowners were not offered mortgage relief. Those reports will be made public to encourage lenders to modify more loans.

The administration also wants to impose tough new penalties on lenders who wrongly deny applicants, including kicking them out of the program or taking away incentives. Freddie Mac is tasked with deciding when and how banks might be punished.

Banks say they are working to prevent errors but are grappling with large volumes of applications and changing government guidelines. Wells Fargo hired 5,800 people this year alone to review modification applications, a 79 percent increase since last year, and initiated its own internal appeals process.

After being contacted by the AP on Tuesday, America's Servicing Company put Gooch's foreclosure sale on hold "to further review the customer circumstance and to determine what is in her best interest," said Kevin Waetke, a Wells Fargo spokesman. The bank also has reimbursed a $938 payment she made, pending the review, he said.

Gooch said she was told she is likely to be reinstated into the three-month trial modification program.

This time, however, she's containing her excitement.

"I still want to see something in writing," she said.

Associated Press Writer Alan Zibel contributed to this report.

When the Indy Mac failed to meet FDIC capital liquidity guidelines, the government agency took over and set up a loan modification program that became the basis for Obama's HAMP program.  The understaffed FDIC, while slow to process, helped modify loans to favorable terms for qualified homeowners. Like the HAMP program. Borrowers typically received a step plan that would start at a very low interest rate (1%-3%) then gradually go up over the years until it reached a low fixed interest rate. As needed the FDIC would stretch out amortizations to lower payments and capitalize delinquencies.  The model program enabled homeowners to keep their property even when they were seriously delinquent.

In 2009, the FDIC then decided to sell off the mortgage-backed securities portfolio to a company comprised of a group of well funded investment companies called IMB Management Holdings, LP, who created One West Bank.  The deal allowed IMB to purchase the $20.7 Billion dollar portfolio for $16 billion, plus the investor received a loss share agreement with the FDIC. 

The attitude and approach of One West Bank is starkly different and the formerly offered loan modification terms have become very rare.  Because One West Bank's cost in the Indy Mac assets is roughly $0.75 cents on the face value of the securities, the bank can quickly foreclose and still make a profit, even where the home is sold for about half the loan amount.  Under the agreement, the Bank receives reimbursement of 80-95% of its "losses" from the FDIC every month.  The residential loss share agreement with the FDIC practically ensures Bank One West will make money on foreclosures even in areas where home prices have crashed.  To read the the actual agreement, click http://www.fdic.gov/about/freedom/IndyMacSharedLossAgrmt.pdf.

As a result, One West Bank is aggressively foreclosing on former Indy Mac customers.   Furthermore, the bank is using questionable tactics to collect past due balances from homeowners. One West will offer a modification to a homeowner under promising terms, collect a 'Good Faith' reinstatement payment or series of trial payments, and then issue a denial of a permanent modification upon further review. This practice is becoming the norm when dealing with One West Bank and is spreading to other lenders as well.

Another addition to the One West guidelines is that anyone who is scheduled for a foreclosure sale is now is required to pay up to 50% of their delinquent balance to delay the foreclosure. The payment does not guarantee a modification or reinstatement, just a short term delay of the sale date and the possibility of a modification.

Homeowners in financial distress should seek a Plan B to loan modification if dealing with the former Indy Mac.  One West Bank has no incentive to help folks avoid foreclosure.

As foreclosures continue to surge, congressional Democrats are pitching bankruptcy courtroom solutions to homeowners' woes, but the Obama Administration says it has "no immediate plans" to revive the measure. 

With foreclosures continuing to climb and midterm elections just a year away, Congress is making a renewed push to allow so-called cramdown, which would let bankruptcy judges adjust the terms of home loans to give borrowers relief.   Loan cram down is part of the existing bankruptcy system, except when it comes to primary residences.  The banking industry hates cramdown but Democrats argue that earlier efforts to fix the housing mess have not done as well as hoped. Moody's Economy.com (MCO) estimates that 3.8 million homes will enter foreclosure this year, up 41% from 2008. No surprise, then, that lawmakers are getting an earful.

Many congressional Democrats think mortgage lenders need to feel the lash before they'll speed up mortgage workouts. Those critics, led by Senator Richard J. Durbin (D-Ill.), figure banks and mortgage servicers will do their best not to cut principal or interest rates on a mortgage. Lenders want to avoid, or at least delay, the loss they take from lowering what homeowners must pay, critics say. And despite an Administration plan that gives subsidies to mortgage servicers who agree to rework loans, many believe the service firms still gain too much from the fees they collect in foreclosure to bother working out a loan.

Durbin and other lawmakers are calling on Democrats to support what is seen as the party's nuclear option: cramdown. The proposal, which sailed through the House last spring, only to stall in the Senate on a 45-51 vote, authorizes bankruptcy courts to adjust mortgages. If Durbin's bill were to pass, a judge could reduce principal or interest rates on home loans and stretch out mortgage payments--something bankruptcy courts can do already with virtually every other kind of debt.

Supporters say cramdown would free homeowners from debt they can't afford while prodding lenders to cut deals before reaching the courthouse. A bankruptcy-court solution would also cost taxpayers little or nothing. Detractors argue cramdown would spook the mortgage market, driving up borrowing costs and making loans harder to get.

Undeterred, Durbin, the second-ranking Senate Democrat, is willing to attach a cramdown provision to any convenient bill if it won't get a hearing on its own. The proposal "will always be part of the conversation, if for nothing else than to scare the [daylights] out of everyone," says one senior Senate aide.

The financial industry, which used major muscle to kill the provision last spring, is arming for the fight, too. "The vote in the Senate was so overwhelmingly close, we're always worried," says one lobbyist. The big banks are leaning on community banks for help: These institutions were largely innocent of the worst excesses of the crisis and tend to be viewed much more favorably on Capitol Hill. "We are kind of the white hat," says a lobbyist for smaller financial institutions. "You'll see a lot of the industry try to hide behind us."

Given the industry's stance, supporters of cramdown say a forceful campaign by the White House would help. President Barack Obama supported it during the campaign and soon after his election, while his chief economics adviser Lawrence H. Summers wrote columns in favor of the proposal last year. But congressional sources say the Administration did little to push for passage of the bill last spring--possibly because Obama was reluctant to place further stress on already fragile banks. Now one Treasury official says the department has "no immediate plans" to revive the measure. Yet even without stronger White House support, Durbin might attract enough senators to embrace the bill if foreclosures continue to surge.

Source:  http://www.businessweek.com/magazine/content/09_42/b4151052063508.htm