Mortgage Horror Stories Hit Home

You’ve read the stories. Thousands of Americans walking away from their mortgaged homes. Nine percent of all loans at least 90 days overdue.

Why?

Because 10 million have “underwater” homes – now worth less than what they owe their lenders.

So what happened to the federal program called Making Homes Affordable that made it risk free or even profitable for banks to restructure those loans?

It’s exactly as the Huffington Post recently reported: “The process of dealing with banks and loan servicers is inefficient, frustrating and difficult to navigate. Those who eventually do receive a loan modification often had waited for months. Our respondents cited lost paperwork, miscommunications and delays.”

Bankers are going to respond that they were swamped and couldn’t keep up with the loan modification requests. There’s some truth there.

But my research supports two other reasons that tell me it’s more than that.

1) The federal program says a bank cannot foreclose if it’s in talks with the homeowner on loan modification. The evidence says the feds have not highly enforced the rule and many banks have ignored it.

2) Yes, the program subsidizes banks that foreclose and take a loss. If the Federal Reserve purchases a risky security for more than the amount a private investor would have paid, it gives a subsidy to the bank that held the loan and taxpayers finance the loan. The bank has a financial incentive to take an up-front hit including sales commissions and get rid of the loan because taxpayers will make good on it.

Why would Washing-ton do that? The Congressional Budget Office says “in our judgment, if the Federal Reserve had not strategically provided credit and enhanced liquidity, the financial crisis probably would have been deeper and more protracted and the damage to the rest of the economy more severe.”

Whatever. But if you’re giving a bank a subsidy incentive to foreclose at a loss, homeowners suffer. Here are specific stories from my closest friend who owns (and is losing) his underwater rental properties:

* “We had four units in escrow for $493,000 and were one week from closing after working on it for 14 months. Chase refused to extend escrow one week and took the property to foreclosure sale for $319,000.

* “We had a condo on which we owed $130,000. Market value was $60,000. We asked for a loan modification to $85,000. Chase refused and took it to foreclosure sale for $58,000.

* “We had one condo property property in short sale for 12 months. The files lost by Bank of America and resubmitted three times. The buyer’s offer was lost and resubmitted twice. Buyer got tired of waiting and withdrew. The bank then took the condo to foreclosure sale. Now the bank writes us saying we can do the short sale, but we had to call them and tell them they’d already sold the house in foreclosure!

* “We have had two forbearance agreements where the lender allowed us six months to make good on missed payments and accrued interest. At the end of the six months, the lender made us a loan modification offer. Some offer. The arrearages and any new costs added to the original loan amount – 150 percent of the market value – and at an interest rate at the current, not old, level. Better to walk away.”

That’s just one person’s tale of the screw-ups, of course. But I suspect there are many more out there.