By Justin Saper
September 28, 2010
Advocates say programs designed to curb the number of foreclosures in Illinois aren’t working because of dishonest practices by mortgage servicers.
Despite the passage last year of the federal Home Affordable Modification Program, foreclosure filings in Chicago’s six-county region rose 38 percent from the first half of 2009 to the first half of 2010, according to data from the Woodstock Institute, which tracks foreclosure activity in the region.
The program, part of President Obama’s comprehensive plan to address the housing crisis and restore economic stability, helps struggling homeowners avoid foreclosure by reducing their monthly mortgage payments.
Among other criteria, eligible candidates must have a monthly mortgage payment greater than 31 percent of their gross monthly income and have suffered a loss of income that prevents them from making payments.
But Katie Buitrago, policy communications associate for the institute, said actual delinquency is not a requirement.
“You don’t have to have missed any payments,” Buitrago said. “You just have to prove you’ve experienced a [financial] hardship of some kind.”
Yet Buitrago said a range of problems on the lending side have hindered the program’s implementation.
Lost paperwork, poorly trained employees and a massive influx of modification requests all contribute, she said. Adding to this, Buitrago said, the flawed incentive structures of mortgage companies can render them reluctant to modify loans. Because many banks now sell mortgage loans to investors, mortgage companies serve as middlemen to collect payments from borrowers.
They collect monthly fees for servicing the loan, even if a borrower stops paying. The longer the borrower is delinquent, the more money these companies can make. As a result, Buitrago said that, in some cases, servicers might be motivated to delay a modification.
Another advocate agreed.
“This is invariably the case,” said Michael Van Zalingen, a consultant for Neighborhood Housing Services in Chicago. NHS offers counseling for homeowners at risk of losing their home.
Van Zalingen said there’s a serious disconnect between what mortgage companies advertise and what customers are told when they apply for a loan modification.
“The talking heads say you don’t have to be delinquent, but for whatever reason they haven’t told their employees that,” he said. “They will tell you, ‘I don’t care. Call me when you’re three months delinquent.’”
In working to prevent foreclosure, Zalingen said NHS divides its clients into two categories—those who are employed and those who are not. Of the cases he sees, Zalingen said about half are employed homeowners citing a decrease in income as the cause for their requests. Zalingen said the objective for this group is to get a loan modification in the form of reduced monthly payments.
For those who have lost their jobs, however, Zalingen said very little can be done to prevent foreclosure. The best strategy for these people is to not cooperate so that the lender eventually offers cash in exchange for keys to the house. This usually happens around six month’s delinquency.
“The problem is that when they reach out to their lender for forbearance, the response they get is, ‘Drop dead. We want your house,’” Zalingen said.
But Illinois’ foreclosure process usually lasts a year, so if a homeowner cannot afford to rent another home, the only real option is to decline this offer and remain in the foreclosed house as long as possible, Zalingen said. But this doesn’t come without a huge cost to one’s credit. According to the Fair Isaac Company’s website, the single most damaging factor to a credit score is a missed mortgage payment.
But Ian Glassford, vice president of Key Bank’s private banking division in Ann Arbor, said the varied complexities of homeowner loans require a case-by-case approach.
“Each individual case is going to be subject to different scrutinies and circumstances,” he said.
Last year, Gov. Pat Quinn signed legislation to better protect the rights of tenants in foreclosure cases, but most of it just ensures that loan servicers comply with HAMP. It’s done little in the way of prevention.
Ultimately, the problem may be exacerbated by the fact that lenders are not actually required to participate in HAMP, which Buitrago said makes it hard for regulators to ensure compliance.
“Once [lenders] decide to participate, they have to comply with the provisions of the program,” she said. “But since it’s voluntary, it’s hard to enforce those provisions.”